Buying and Selling Bonds
The way you buy and sell often depends on the type of bond you select. Examples and how to buy: treasury and saving bonds, TIPs, discounted bonds, corporate and municipal bonds.
Buying Treasury Bonds
Treasury Bonds can be bought and sold in increments of $1000 through an account at a brokerage firm, an investment professional, a commercial bank or an online broker. They can also be acquired directly from the U.S. Government via an account online, in which case, the treasury cannot be redeemed before maturity.
The federal government has regular auctions in which investors can partake, however, in order to sell a bond in the secondary market it is necessary to consult the helping hand of a broker because they are not directly sold through the U.S. Treasury. They are auctioned off where the price is not more than $5 million if the bid is non-competitive or 35% of the offering if the offer is competitive.
Ready to Sell?
If it is a Treasury Bill you wish to sell, like bonds, these are sold in denominations of $1000. The profit of a Treasury Bill comes from the difference between the discounted value you originally paid and the amount you receive back, due to the fact that these bills function as IOU’s and there are no regular payments made to your name. The money is not gradually earned back over time; rather, it is a larger sum than its initial value, which is paid back at the end.
Treasury Notes are usually used to earn a cash flow for life markers including college or retirement. They can be through an auction via a competitive bid, where the yield you stipulated may not be approved, or a non-competitive bid, where you take the yield determined at the auction even though it may not coincide with the yield you specified.
U.S. Savings Bonds are sold through the U.S. Treasury and managed by the Bureau of Public Debt. They can also be purchased from commercial banks and are usually obtainable through employee savings plans. Savings bonds are exempt from state and local income taxes and mature at 30 years, with accrued interest compounded semiannually until maturity. They can be cashed in after 1 year but a 3-month interest penalty will be surface if you redeem the bond within the first 5 years. The savings bonds can be purchased at a bank or online but the bond purchaser cannot sell or pass up ownership of the bond.
The option to purchase paper savings bonds exclusively exists with your tax refund. Through this method you can only buy Series I bonds which allows your savings to exist in a low-risk environment that aids to shield your savings from inflation. Series I bonds earn interest based on combining a fixed rate and an inflation rate and are only taxable on a federal level, not state and local. These are also common ways to invest for college and retirement.
Treasury Inflation Protected Securities may be purchased from banks, brokers and the official website of the U.S. Treasury. Most independent investors buy TIPS through a mutual fund or exchange-traded fund that have a basket of inflation-protected securities with maturities of 5, 10 and 30 years. The initial price of TIPS is decided at the time the U.S. Treasury auctions it to potential investors. Since the principal value fluctuates along with inflation, only the coupon interest rate is fixed for the life of the bond. So, as inflation increases so does the value of the bond. Even though the interest rate does not necessarily increase, the investors receive a greater cash payment because the percent is applied to the larger principal. It is worth noting: it’s extremely recommended to only invest in TIPS if the bond is held until maturity.
Discount Bonds that are issued below par, including zero-coupon bonds, will gradually increase in price closer to the date of maturity. But, this does not translate into investors gaining a better yield than the market. It’s important to buy these low coupon bonds after taxes are accounted for.
There are four main groups of corporate bonds, divided by sectors: utilities, transports, industrials and financial services. They are more risky to purchase than Munis or Treasuries but it’s usually evened out with a higher interest rate. There are some guidelines you may follow in order to take a generally safer approach to buying corporate bonds; these include anticipating whether interest rates will decrease in the future, behaving nervously about the stock market and not having a clear perspective on the stock market.
Municipal bonds can be bought through several banks, securities dealer firms or Internet brokers registered to buy and sell municipal securities. It is a dealer-oriented market where the owner makes a profit from selling a municipal bond based off the markup. The bonds can be bought when they are first purchased to market or in the secondary market. The latter alternative leaves room for the opportunity to select from a wider range of procurable securities, which can differ by issuer type, maturity years, coupons and ratings.
Corporate CEOs Sour On Economic Recovery, Varney Warns: No More Lockdowns
Corporate executives aren’t expecting a full economic recovery until the end of next year. This is according to the Q2 CEO Economic Outlook Survey conducted by Business Roundtable.
The bearish outlook coming from a generally optimistic group is concerning for those hoping that the economic recovery is slowly underway. The survey indicated that the executives are hesitant to increase capital spending, hiring plans or sales expectations for the rest of the year.
The index’s overall reading contracted to 34.3 in the second quarter. This is the lowest reading since the midst of The Great Recession in 2009.
As a group, expectations were for the country’s gross domestic product to shrink by 3.8% this year, and more than one-third of respondents expect it to take until 2022 for the economy to fully recover.
Joshua Bolten, president and CEO of Business Roundtable, said in a statement, “The outlook of Business Roundtable CEOs reflects the reality of current economic conditions. We appreciate the actions taken by the Administration and Congress so far to help American workers, small businesses and communities, but there is much more to do. We encourage policymakers to work together on additional measures that will help bring a rapid end to this public health crisis and encourage economic recovery efforts as business operations resume.”
No Round Two
If we are hoping for economic recovery anytime soon, we can’t shut down the economy a second time, says Fox Business host Stuart Varney.
“Quite simply, the economy couldn’t take it. Nor could all those people who have been locked in with abusive relationships. And all those people denied life-saving medical tests and elective surgery. We can’t go back to that,” said Varney.
Varney said efforts to minimize or lessen the effect of a second wave of outbreaks should be on a local, not national level.
“The president says no new national lockdown. Instead, put out the fires at the local level,” Varney said. “That’s what the bar and beach closings are all about. Wear masks, keep your distance, wash your hands. That’s the policy. Contain the outbreaks. Limit the spread.”
Numerous states, including California, Florida and Texas are either rolling back reopening plans or implementing new restrictions. These come as the number of coronavirus cases rises. Varney said we just need to live with the virus as part of our lives.
“We can argue all day long about whether it’s a spike in new cases or a surge, or a ‘serious’ increase’. But the fact is, the number of new cases is going up, especially in some of the states that started to reopen,” said Varney.
He added, “There will be some impact on the pace of the economic recovery. You can’t expand rapidly if there are still restrictions on economic activity. The virus will not go away completely any time soon. There are going to be local outbreaks. There will be local shutdowns. That’s the way it is. That’s what we have to live with.”
And he says absolutely no second shut down.
“Once was enough,” he said.
Fed Buying Bonds Of Apple, Visa Raises Questions About Programs
Do bonds issued by Visa or Apple really need help from the Fed?
It’s a question many investors and analysts are asking after the latest disclosures from the Federal Reserve show the central bank is buying bonds of companies that face no liquidity concerns or challenges in the secondary market.
To be fair, the Fed is buying bonds of companies that are struggling. These companies are at risk of seeing the demand for their bonds dry up.
But bonds issued by Visa, Microsoft and Home Depot aren’t what many had in mind when the Fed announced it would buy bonds in the secondary market to ensure the market didn’t freeze up amidst the first wave of coronavirus shutdowns.
And other well-funded and stable companies like Apple and Goldman Sachs, who have bonds held in a handful of bond ETFs, have indirectly benefited. This happened as the Fed has bought roughly $6.8 billion of bond ETFs since the programs started.
Kathy Jones, director of fixed income at Charles Schwab, shares her piece about the situation. She says “It does sort of make you wonder if it makes sense for them to be buying bonds of Apple. Spreads are so tight and stocks are doing so well. You wouldn’t think they would need support from the Fed. The reasoning I guess makes sense. But when you look at the outcome, you scratch your head and wonder whether this is where we need the money to go.”
The Fed disclosures show it has purchased $430 million in individual bonds and $6.8 billion in ETFs. This, admittedly, makes up a small fraction of the $210 trillion corporate bond market and $961 billion fixed-income ETF market.
The Fed’s purchases, so far, remain limited to the secondary market. However, plans are for the Fed to soon start buying bonds directly from the issuing companies.
Goldman Sachs have bonds purchased by the Fed through bond ETFs. The said company not only sees the potential for moral hazard but two more challenges. These include a misallocation of capital and a diminishing appearance of independence for the Fed.
The bank believes, however, that the worries about moral hazard and a perceived loss of independence will diminish as time passes. They believe this will happen as long as the Fed continues to steer the markets properly,
Charles Schwab’s Jones doesn’t let the Fed off quite so easy. “I do think it’s a moral hazard. I think it’s something they’re going to have to deal with when things settle down. There will be accusations that they committed money in ways that didn’t make sense and didn’t help the average Joe.”
Former New York Federal Reserve Bank President William Dudley agrees with Jones.
During a recent interview with Bloomberg Television, Dudley said the Fed not only encourages bad behavior, but they also rescue those that made bad decisions.
“People who have high-yield debt that’s outstanding, a lot of times that’s happened by choice. So for the Federal Reserve to intervene and support those asset prices, is basically creating a little bit of moral hazard in the sense you’re encouraging people to take on more debt.”
“We had a number of players in these last few months that have essentially been bailed out by the Fed: Hedge funds that were invested in cash Treasuries, and short Treasury futures,” Dudley added. By purchasing Treasurys, the Fed helped “those entities unwind what turned out to be a bad trade.”
‘Retail Bro’ Traders Battle Wall Street, We Are ‘Poor Investors and Worse Traders’
As we look back one day, the rise of day traders may become the lasting memory we have from the massive stock market rally from the late-March lows.
Dave Portnoy, the unofficial leader of this “retail bro” army, is sure to leave his mark in the history books. After his brash proclamation a few weeks ago that he was “better than Buffett, the founder of Barstool Sports is doubling down on his efforts to disrupt the status-quo on Wall Street.
Portnoy recently wrote an op-ed piece on Fox Business. There, he says Wall Street veterans originally embraced him as a “loveable loser.” He said it came about as he struggled to transition from sports betting to wagering on stocks.
But he says as he started to win more than he lost, Wall Street turned on him.
‘In the beginning, I struggled. I was down $2 million before I could blink, and all the self-proclaimed pundits and talking heads on Wall Street treated me as a lovable loser,” said Portnoy.
“The finance community welcomed me with open arms. But then something funny happened along the way. I started winning and they started losing.
“The more I won, the more mad they got.
“I openly wondered whether I was better than some of the legendary (albeit geriatric) traders of past generations… Yet here I am. Beating them like a drum for the past three months at their own game.”
Portnoy’s contention in his op-ed is that Wall Street doesn’t think “Joe Public can be smart enough or trusted enough to invest our own, hard-earned money. Only they have that knowledge and insight on what is best for us.”
It’s not just that Wall Street doesn’t think the general public is equipped to day trade stocks. History has also shown that “Joe Public” trying to beat the market on his own is a losing bet. This is according to Vasant Dhar, a professor at New York University’s Stern School of Business.
“There are very few things in life that are more important than money. Acquiring it is difficult and growing it is challenging. The last thing you want to do is gamble,” says Dhar, but that’s exactly what Portnoy is telling his “retail bro” followers to do.
He picks stocks by randomly combining Scrabble tiles to form ticker symbols.
That’s not investing. That’s gambling.
Dhar cautions those who are thinking about trying their luck. He feels particularly worried about the young traders who turn to apps like Robinhood, believing that their trades are free.
“Do not get sucked into digital trading platforms — no matter whether they have noble-sounding names or are “free.” You will most likely lose your money or worse. There are better ways to make money.”
He says unless you have an edge, you are better off simply buying an index fund and taking advantage of compounding.
“With the exception of people like Warren Buffett, humans are poor investors and even worse traders. Sure, the occasional human might get lucky, but in general, the odds are heavily stacked against you. Unless you have some special information or expertise, you are best off investing in a market index as early in life as possible and enjoying the benefits of compounding.” added Dhar.
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