Do you buy individual bonds?

[disneysteve]

If you invest in individual bonds, tell me about it. Where do you buy them? How do you pick them? What are typical commissions and fees?

[LivingAlmostLarge]

Not yet but I've considered it. I helped my mom buy I-bond when the fixed portion was above 2%. I would like to but I think I need to learn more as well.

[kork13]

I'm watching this thread to see what everyone says... But all I've done personally is to buy bond funds or I-Bonds (technically could be considered an "individual bond", but I don't really view them that way, since they aren't traded on the market). So nothing to add, just 'subscribing' to the thread for some learning.

[feh]

I-bonds are the only individual bonds we hold.

[Goldy]

We have some EE bonds but other than that no.

[disneysteve]

Hmmm. I seem to have hit on a knowledge vacuum here. We own I-bonds also but those weren't the kind I was talking about. I meant munis or corporate bonds.

For years, I've listened to Suze Orman tell everyone to never invest in bond funds, only individual bonds. Dave Ramsey says the same thing (actually he doesn't invest in bonds at all but defnitely not bond funds). Particularly in an environment of rising rates, bond funds are more risky since you can't hold something until maturity and get a fixed rate.

When I first started investing in a bond fund, we didn't have the asset base to buy individual bonds but we do now and I'm thinking about transitioning over. I would prefer to keep the money at Vanguard. I know they sell bonds and have a slew of online resources for learning about them. I was just hoping someone could share some real life experience.

[feh]

Hmmm. I seem to have hit on a knowledge vacuum here. We own I-bonds also but those weren't the kind I was talking about. I meant munis or corporate bonds.

Head over to bogleheads.org Steve. There are folks over there that buy individual bonds.

[disneysteve]

Head over to bogleheads.org Steve. There are folks over there that buy individual bonds.

Thanks. I'll have to do that.

[$ hoarder]

I'm so excited to be able to help you Disney Steve! You seem like one of the more experienced/educated posters who always has something helpful to add. Suze Orman recently changed her opinion regarding municipal bonds. She recommended municipal bonds as interest rates are rising a little in one of her last couple shows.

[msnln]

I used to be an institutional bond trader for 13 years but left that business 10 years ago and I have bought treasury strips from a full service broker a long time ago for personal account. There is no commission as it is priced in to the offer price of the bonds. I bought $10,000 face value and the broker tried to talk me out of the sale, which is first and only time this has happened. I guess it is not worthwhile for them to sell these at such small denominations. For retail customer, pricing is really bad to the point unless you have specific strategy you are trying to achieve by the bonds, it is not worth the purchase.

It is just like buying any other financial instrument. You tell the broker exactly what bond you want to purchase and they will sell it to you. I just tried Schwab, where I have an account, to see if I can buy through them but because the market is closed, I cannot search for the bonds, or get any type of quotes. Bond market used to open from 8 AM to 3 PM Monday-Friday but I am not sure if that had changed.

Just out of curiosity, why are you specifically looking for bonds? If Fed starts tapering, or worse raising interest rates, bond prices will go down. Bond prices move inversely to the interest rate. For price movement, if the rate goes up by 1%, bond price will come down by 1% X bond duration. Duration is present value of all future cash flow. So, 10 year 0% coupon bond will have duration of 10 years, but 10 year 10% bond will have duration of 8.XX years. XX would be somewhere between 70 and 80 guesstimate. So, you are essentially losing 9% principal for each 1% rate rise. This is not the right time to be investing in bonds. Bonds are usually bought when interest rates high and it is poised to come down, or for corporate bonds, when the economy is going from really bad to good (corporate bond spreads are priced treasury benchmark plus additional spread. When economy is bad or company's outlook is bad spread widen but starts tightening as economy outlook improves or company's repayment outlook improves). I suppose you can argue that the economy is improving, but treasury rates are moving up so tightening spreads over rising rate will not offset it.

One area where the yield is still decent is municipal bonds but there have been a bunch of cities defaulting and I think that might be the reason.

If you have any specific questions, I would be happy to help. However, I only visit the site every few days, so you will have to be patient with me.

[feh]

Just out of curiosity, why are you specifically looking for bonds?

It's my understanding that for people that want a known return on their investment, and they are positive they will hold the bond until maturity (ie. a bond ladder for living expenses in retirement), individual bonds can make sense. In theory at least.

For somebody that is merely looking for fixed income in their retirement portfolio, I personally suggest a total bond market fund (assuming you have at least 7-8 years before you'll need it).

[msnln]

In this artificially low interest environment, bond investment does not make sense. If one want known return, I would think annuity would make much more sense with low rates we have.

Typically in normal market, as the rates rise stocks go up because rising interest indicates growing economy. As the economy cools, Fed will lower the interest to stimulate the economy, helping the bonds. However, in current market with Fed stimulus, we have had both stocks and bonds rise together and when stimulus ends bonds will fall with rising interest rates and stocks will fall too, creating a double whammy.

[disneysteve]

I'm so excited to be able to help you Disney Steve! You seem like one of the more experienced/educated posters who always has something helpful to add. Suze Orman recently changed her opinion regarding municipal bonds. She recommended municipal bonds as interest rates are rising a little in one of her last couple shows.

Suze Orman has always recommended bonds. I believe much of her personal wealth is in munis. She advises against bond funds though. She says you should only buy individual bonds. That's what I was asking about.

[kv968]

If you invest in individual bonds, tell me about it. Where do you buy them? How do you pick them? What are typical commissions and fees?

A couple of commission comparisons...

Scottrade has a $5000 minimum on newly listed munis and corporates and doesn't charge a "commission" but acts as principal and will markup the price (how much exactly I don't know but probably 1-3%).
On secondary corporates they charge a $35 fee + $3/bond with a $1000 minimum.

Vanguard (as I'm sure you've looked already) doesn't charge a "commission" on newly offered corporate's either but will probably mark them up as well and has a $10k minimum. They charge $2 per $1000 face amount (i.e. one bond) for "Standard and Voyager Clients" with a minimum of $1000 on corporate's and $5000 on munis. The thing to keep in mind with minimums however is sometimes minimum quantity is more like 5 bonds.

As far as how to pick them, it depends on what you're looking for. If you want to invest in "investment grade" corporate's look for anything with an S&P rating of BBB or Moody's rating of Baa3 and above. Maybe in your tax bracket it would make sense to look at some NJ munis. To find the equivalent taxable rate just the munis yield and divide it by (1-your tax rate) to get a comparison. When buying munis, there are two types...revenue and general obligation bonds. Revenue bonds pay from the revenue they receive from the project (i.e. water treatment plant, hospital, etc...) a general obligation bond is paid from tax revenue of the municipality. General obligation bonds are usually considered the safer of the two.

I'd say the most important thing to look at (besides ratings and maturity date), especially if you're planning on holding the bond to maturity, is the Yield to Maturity (YTM). That'll tell you how much you will really make annually on the bond. People tend to focus on the coupon and not take into consideration that they've may have bought the bond at a premium and if they hold it to maturity they won't get back all of what they've paid for it.

There's also Yield to Worst (YTW) which would give you the annual yield you'd get if the bond were to be called but in this rate environment I can't see many recently issued bonds being called.

Another thing to keep in mind is that there can also be a pretty substantial spread in bond prices when compared to stocks since corporate bonds usually aren't traded very often.

[disneysteve]

Thanks kv. Good info.