LOS ANGELES (MarketWatch) -- The stock market has risen relentlessly, and real estate and commodity markets have peaked. It's a good chance to park some cash, as a lucky few did in the late 1990's. Are bonds the answer? That's for you to decide. But just as the Internet and e-broker platforms revolutionized stock investing ten years ago, now it's becoming easier for individual investors to invest in individual bonds. Here's why.
Historically, bond investing has been the domain of institutions and a handful of elite brokers. Try to buy an individual bond and you'll be amazed at what you will - or won't find. Designed for institutional players, bond investing tools resemble a visit to the dungeon in Hogwart's Castle: Weird terminology and acronyms flying around like energized bats and a strong sense that many bond features, research or records of previous trading are forever hidden behind closed trap doors.
And if you happen to find a bond you like you won't necessarily be able to buy it, unless some dealer just happens to have a few lying around.
As a result, bond mutual funds have been the "push" of most investment advisers. But it's a steep 20% admission charge to attend the party -- 80 to 150 basis points (0.8% to 1.5%) in management fees on an investment designed to earn about 5%.
This is hardly a consumer-friendly choice. I've always thought it odd that one of the market's safest havens is so difficult for the individual investor - at least until now.
For years, individuals could buy U.S. Treasury savings bonds online easily through Treasury Direct (see SavingsBonds.gov). But that was about it. Discount and so-called "premium discount" brokers have made what's best described as a slow push into electronic individual bond investing. Of those I checked out, Fidelity and its Open Bond Market platform introduced in late 2004 seems to have come the farthest.
The Open Bond Market brings many of the features sought by stock traders to an individual's fingertips: research capability, selection tools, price transparency and trading history. Further, the Fidelity platform provides liquidity by adding the inventory of some 80 plus dealers and some 10,000 issues, cutting out the painful search for a dealer with inventory at an acceptable price.
What's under the hood
The Internet stock trading platforms of the late 1990's were made possible by repackaging tools previously used by professional traders. And so it is with Fidelity and most of the others. A rapidly growing Wall Street firm known as MarketAxess (MKTX : MarketAxess Holdings, Inc.
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14.95, 0.00, 0.0%) has built an electronic bond trading platform incorporating information, analytics, and price and trade history for investment-grade and high-yield corporate bonds for institutional investing clients. Known as Corporate BondTicker, platform elements are now being adapted to retail by Fidelity and others.
The appearance of real-time information has had a tremendous impact on price transparency and trading efficiency in the market. According to MarketAxess spokesman Stephen Davidson, quoting a recent study, some $1 billion in trading cost savings has been realized by institutional clients annually.
"The secret is providing transparency, price discovery and superior liquidity investors seek," he said. MarketAxess currently handles some 90% of electronic investment-grade corporate bond trading today, of which only 8% to 10% currently is brought in through the retail channel. While MarketAxess itself currently has no plans to enter the retail trade, you're likely to see a growing presence of efficient and retail-friendly e-platforms built upon the functionality that supports Corporate BondTicker.
Using the tools
I'll be the first to point out that, even with better tools, buying individual bonds isn't for everyone. Credit risk makes bond diversification very important. That, combined with the use of laddering to spread maturities and reduce interest rate risk, means that individual bond investing probably isn't for smaller portfolios.
But if you have a larger portfolio, say $100,000 or more, it's worth checking out these tools. Even if you're not at that "number," it's not a bad idea to learn about these tools and bonds in general.
Fidelity has done a nice job of bundling the tools and making them easy to use. The Bond Selector lets you select among a wide assortment of issuers and bond types. Visit the site.
Important features include:
Screener. Narrows the search to certain types of bonds, yield ranges, and risk ratings. Also allows selection of Fidelity "Tier 1" - a group of issues pre-screened by Fidelity for quality.
Industry selector. For corporate bonds, you can choose one or more industries.
Risk-reward tools. The handy "scatter graph" lets you visually pick a spot on the yield curve. Mouse-overs reveal the individual bond and agency rating for each point on the scatter graph.
Laddering tool. Visually construct a bond portfolio to meet income needs and risk parameters over a longer term.
Reduced commissions. Online trades cost 50 cents each for U.S. Treasuries (free for initial auction Treasuries) to $2 for corporates with a minimum of $19.95 per trade.
Anyone intending to buy individual bonds should take the time to learn bond investing techniques and strategies. E-broker educational tools are a good place to start. I also recommend the instructive American Association of Individual Investors' frequently-asked questions page. See the site.
Reinventing the bond market
Creating a friendlier and more level playing field for do-it-yourself individual investors is the whole idea, and there are signs it's working. According to Andy Wrobel, senior vice president for retail fixed income securities at Fidelity, some 80% of Fidelity's retail client bond trades are now done online rather than through brokers. This compares to 30% when the Open Bond Market started out. Customer response has been "overwhelming."
Wrobel adds: "Our goal was to reinvent the bond market for the retail customer. The bond market was like buying a car 10 years ago; with no real time Blue Book or any other tool you never knew if you were getting a good deal. That's changed now."
It's still in the early stages, and I don't expect people to ever trade bonds like stocks. But as far as expanding possibilities for individual investors, I believe he's right.
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