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Friday, September 16, 2011

Bonds (Part 3)

Buying individual bonds is not easy.  Anything under $1 million is an odd lot and will typically not get a good bid or offer price, they trade over-the-counter, are difficult to price, and come with a lot of bells and whistles.  Still, some DIY investors prefer individual bonds because of their specificity and directness. With individual bonds, you know exactly what you own and you have control over holding to maturity or selling.

If you aren't familar with how  over-the-counter markets work, check out the YouTube "Over-the-counter, over-the-top" by Paddy Hirsch, Marketplace senior editor.

Because the bond market is an over-the-counter market, it has been difficult to get transparency on bond pricing.  This, of course, has been beneficial to Wall Street which thrives on opaqueness.  The Financial Industry Regulatory Authority (FINRA) has remedied this to a degree by requiring trades to be reported so that investors can see recent trading activity in specific bonds.  This allows bond transactors in  government, corporate, and municipal bonds to see recent price and volume data at a bond specific level.

Trading Activity in Merck Bond

In Bonds (Part 2) I showed a specific Merck bond held in my Schwab account:

Source: Schwab
CLICK IMAGE TO ENLARGE  Suppose I was interested in selling this bond.  I can see that Schwab prices it at $123.9677.  How realistic is this?  Has this particular bond traded recently?  Or is this bond being priced using a matrix approach whereby the price is determined by similar bonds that have traded - sort of like pricing real estate?

Actually, trade data can be obtained at the FINRA site.  Click "Bonds" under "Market Data" and come to

Source: FINRA
 CLICK IMAGE TO ENLARGE Again, fill in the "corporate" bubble and click "Advanced Bond Search" as indicated.

On the next screen, at the "Search by" option select "CUSIP" from the dropdown list.  The CUSIP is a security identifying tag.  If you look back at the bond listing as shown by Schwab above, you'll see the CUSIP: 589331AE7.  This will take you to :

Source: FINRA

 CLICK IMAGE TO ENLARGE  Note that here you have the price of the last sale, $124.654, and the yield, 3.959%.  This, of course, is valuable info to keep a broker honest if you happen to be buying or selling this issue.  But we can get more trade data by clicking the bond's name and scrolling down to the "Search for Bond Trade Activity." Here we can specify a date range and click "get results." I specified a 10-day period and came up with the following trade activity:

CLICK TO ENLARGE IMAGE  Finally you have the trade specific info, including size of trade, date, price, etc.

With this type of data, a bond buyer can more readily ascertain whether bid and offer prices are reasonable.

The FINRA site has an excellent tutorial explaining the site and how to get information.  It also should be noted that they have numerous disclaimers which should be respected because, after all, they are collecting data from outside parties on the behalf of investors but obviously cannot be held accountable for that data.

1 comment:

  1. I don't play with individual bonds; my portfolio requires more diversification.