Where To Buy Bonds?December 26th, 2011 by David Waring
You can buy Treasury Bills, Notes, Bonds, and TIPS directly from the US Government. This is a good option ONLY if only plan to by Treasuries and hold them to maturity.
Discount Brokers (like Zions Direct, Fidelity or Schwab)
There are a number of discount brokers that enable you to buy and sell Treasury, Corporate, or Municipal Bonds. Many of them have online platforms. This is a good option ONLY if you can do your own research in selecting bonds.
Bond Specialists / Financial Advisers (like Raymond James, Wells Fargo Advisers)
You can learn more about each option below:
The Treasury department is constantly selling debt to pay for new government spending or re-finance debt that has matured. The debt, which is referred to as “Treasuries,” is sold at auction to the highest bidder.
The government sets aside a certain amount of treasuries from every action for “non-institutional” investors. Unlike other types of bonds where there is often little price transparency, this process makes bidding for Treasuries very transparent. Individuals pay the same exact price as the winning bidders and are guaranteed to get the bonds. You do not pay a commission for using Treasury Direct either.
While these are some nice advantages, there are several downsides to using TreasuryDirect.gov:
- You cannot sell treasuries through TreasuryDirect.gov, since they are not a broker. If you want to sell treasuries bought through this site before they reach maturity, you have to transfer the bonds to a broker, which is a hassle.
- You are limited in what you can buy, as TreasuryDirect.gov only sells Treasuries. If you want to buy any other type of bond, you cannot do it through this site.
- You are limited as to when you can buy, as TreasuryDirect.gov only offers auctions for specific treasuries a few times a month.Discount Brokers
Many discount brokers that offer the ability to buy and sell stocks, also offer the ability to buy and sell bonds. Brokers like Charles Schwab, Fidelity, and E-Trade all charge a $1 per bond commission (as of Dec. 8th 2011), for all bonds outside of Treasuries (which are offered commission free).
A typical retail bond trade will range from 25 to 50 bonds, which would equate to a $25 to $50 commission per trade. While the bigger brokers will often add a mark-up on the “true market price” for a bond, their mark-up will generally not be excessive.
The downside of buying and selling bonds through a discount broker is a lack of research.
Most discount brokers provide lots of free charts, analysis and recommendations for trading stocks. There are also plenty of sites that offer free quality research and market information on stocks. This is not the case in the bond market, where there is little to no information out there to help determine which bonds to buy and sell.
Financial Advisers and Bond Specialists
Financial Advisers and Bond Specialists can make recommendations as to which bonds you should buy. A good financial adviser will take into account your financial goals, your tax situation, and your risk tolerance in making investment decisions.
It is important to understand however that when it comes time to execute your bond trade, it is often not your broker that does the trade. Instead your broker gives the order to the firm’s trading desk, which in many cases will add an additional markup on the trade.
Ironically brokerage firms that specialize in bonds can be some of the worst places for individuals to get a fair price on a bond. The story goes like this. The brokerage firm buys a big chunk of bonds issued by a company that is in financial trouble. The bonds are selling well below their face value. The brokerage firm then has it brokers sell the bonds at a price which is close to their face value and pockets the difference. The client has basically overpaid for risky bonds.
This lesson is part of our Free Guide to the Basics of Investing in Municipal Bonds. View the free guide here.