In our municipal bond educational, we have stated that bond trading is an opaque art unlike stock trading. There are many hidden traps and bad deals with high markups abound. Clearly if you are trading large blocks of bonds like the big institutions, you will receive the best price. Individual investors will pay a markup for smaller lots of bonds. It is possible to pay $10,000 for bonds that are broker bought for $9000 earlier in the day. A goal is to shoot for a less than 2% markup.
Online Bond Trading
Unlike stocks, online bond trading with the major brokerages will not yield the best results. Online brokers charge a low $1.50 to trade a bond, but the price of the bond has already been marked up. Things get even worse when trying to sell a bond nearing maturity. One area where markups are not as bad are with new issues. California advertises many new issues on the radio, seeking individual investors, and advertising the fact that there will be no added markup.
Online Trading Example
We decided to document markups and show specific case, so investors can learn and avoid high markups. The example we use is heavily traded Los Angeles transportation bond, roughly 10 years out, maturing in 2021. This bond’ s CUSIP number is: 544712D82
We first Municipal Securities Rulemaking Board to find the official statement and financial information for this municipal bond and recent trades. You can also visit investinginbonds.com to find the last trades for this bond. The last trades for this particular bond are around:101 showing yield of 4.1%
We check Charles Schwab to see how much they sell this bond for. We tried to purchase $25,000 of this bond and we receive a price of 103.76, a yield of 4.0%.. Comparing the Schwab price to the last couple transactions we noted above, we see that we are paying a 2.5% premium.
We run the same check that Fidelity Investments and find that they sell a bond for $103.665 when we ask for a $25,000 chunk. A slightly smaller premium than Schwab, and they even have a link that shows recent trades, so you can see the transactions that 101. At least Fidelity lets you enter a limit price or limit yield.
At Vanguard, the price of the same bond is $103.665, with a him $50 commission on a $25,000 order. You cannot sell munis there.
Optimizing Bond Pricing
How can we minimize the markup? Pricing can vary widely and markup is less that bond brokers where you can set a price for haggle. It is best to have multiple accounts at different brokerages, some of which would be full service brokerages. It is most optimal to have at least one account at a major underwriter such as Citi, Goldman Sachs, J.P. Morgan, Morgan Stanley, Merrill Lynch, or Wells Fargo. There are usually regional firms that deal in bonds. In the San Francisco Bay Area these would include Stone and Youngberg and Alamo Financial.
Ask friends who they use, Google the firm and the broker. Call the firms office manager and ask who is a fixed income specialist is. Beware of brokers who sound like used car salesman.
Be sure to check out your new firm and broker checking the databases at:
- napfa.org – locate financial planners
- brokercheck.finra.org – check on a broker
- adviserinfo.sec.gov – check out an investment advisor or advisory firm
Additional Related Municipal Bond Educational Articles:
What are municipal bonds?
How to Research Municipal Bonds
The Risks of Owning Municipal Bonds
How to Buy And Sell Municipal Bonds
Municipal Bond Mutual funds – Municipal Bond Managed Accounts
What Are Closed-end Municipal Bond Funds?
What are Municipal Bond Exchange Traded Funds or ETFs
How to Make a Municipal Bond Ladder
How to Select Municipal Bonds
Municipal Bond Trading Example
How to Perform Active Municipal Bond Management
Municipal Bond Books and Educational Resources