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Investing in bonds is far different than trading bonds!
Start with the costs. I can turn a bond futures contract worth $100k+- for
well under $20 in round turn costs and trade in a very liquid market where
bid ask spreads are a tick (1/32) ... this is good for trading. Following
First Notice Day at the end of the quarterly contract, I can exercise a long
bond contract for a exchange designated "equivalent" cash bond contract ...
this requires both care and knowledge.
Cash bonds are a different animal and you will not be able to deal for
anything approaching the 1 tick spread typically shown in the WSJ treasury
tables. When I buy 100 (x 1000) cash bonds worth $100k+- at Fidelity, I am
doing business with a dealer who carries its own inventory where I am shown
the ask only to buy bonds but must sell bonds by phone ... typical spread is
around 32 ticks or 1% so my cost to buy 100 cash bonds will be around
$1,000+-. To add insult to injury, they will sock you with a $75 commission
if the order is for less than 25 bonds - a fact which can make it expensive
for a modest account to "ladder" bonds across a range of maturities. Bottom
line, when I buy a cash bond I expect to hold it for some years. Further,
Fidelity bond traders will not always honor posted quotes ... a fact about
which the SEC seems to be curiously uninterested. I have looked for other
bond brokers but the information available on broker spreads is pretty hard
to come by.
Treasury bonds issued post Feb-1984 are not callable, whereas bonds issued
prior to that date are callable 5 years before maturity e.g. 1983 + 30 =
2013 maturity which would be callable 2008. If a bond is callable, you must
look at yield to the call date rather than yield to maturity date (this is
true for all bonds, not just treasuries).
Since longer term bonds are issued all across the interest rate cycle, you
will find bonds offered at a premium to par because the coupon rate is above
the current market rate, and bonds offered at a discount to par because the
coupon rate is below the current market rate. Bottom line for a long term
bond investor is that it does not matter because the price/yield
relationship will be at current market rates with the premium/discount
effectively being prorated over the term to maturity because redemption is
always at par (the guaranteed return of par and the coupon payment is what
makes bonds different from stocks). Further, as a long term investor, you
can look for the "off-run" bonds which carry small premiums in yield over
the "pure" 30 ... see the treasury bond tables. I hold cash bonds with
yields as high as 8.125 and as low as 5.5 ... don't really care that much
about premium/discount, am looking at the quoted yield when I purchase. All
things being equal I prefer to purchase at a discount e.g. 95 to purchasing
at a premium e.g. 124. There are instances where premium/discount can make a
real difference over the short term. This is true of taxes and it is true in
bond funds which can "juice" stated yield by loading in higher coupon bonds
trading at a premium.
Earl
----- Original Message -----
From: "Michael Ferguson" <wl7bdn@xxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Sunday, January 13, 2002 8:58 PM
Subject: Re: [RT]Bonds 101
> Supposing someone is holding a T-Bond from 11% days, pretty good returns,
> why would someone sell it back to the treasury buy-back ?
>
> I thought I saw a strategy to work up higher yields in a bond portfolio.
The
> higher the better, yes?
> So how did the treasury buy back work? What is the incentive to sell?
>
> More 101 stuff
>
> Michael
>
>
>
> To unsubscribe from this group, send an email to:
> realtraders-unsubscribe@xxxxxxxxxxxxxxx
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>
>
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>
>
>
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