Bonds can be purchased on both primary (when bonds are first issued) and secondary (subsequent trading) markets. There are wholesale markets for large institutions (with trades of at least $1 million) and retail markets for individual households.

TreasuryDirect.gov is available for purchases of traditional U.S. Treasuries, TIPS, and I bonds, in taxable accounts, without any transaction costs.

Click here to download Wade’s fact sheet, “What Is a Bond and How Does It Work?”

When newly issued bonds are purchased at an auction, buyers receive the same wholesale pricing as large institutions and more deflation protection for TIPS because the accrued principal has not increased yet. There are no mark-ups for pricing.

The downside is that auctions provide less flexibility in maturity dates and you have to wait for the next auction. The secondary market will also be needed to construct a complete ladder, as only a few maturities might be available at any given auction.

Many brokerage accounts will also make new issues available for their typical brokerage charges.

Brokerage accounts have to be used for purchases in IRAs or other qualified retirement accounts. They can also be used to make purchases on the secondary markets for either taxable or tax-advantaged retirement accounts.

For secondary markets, there can be large mark-ups on pricing due to a lack of pricing transparency and lack of liquidity, especially outside the markets for Treasury debt.

The bid-ask spread creates a wedge for bond pricing. Wholesale prices are provided daily by the Wall Street Journal for Treasury bonds.

The bid price is how much the bond can sell for, while the ask or offer price is how much one pays to buy the bond. A markup is the additional amount that the broker-dealer intermediary adds to the wholesale ask price in order to sell the bond to an individual investor.

Investors may have no idea what the markup is, as it is not transparent. Those individuals selling bonds may also need to pay a markdown to the intermediary that is below the wholesale bid price.

Markups and markdowns are generally smaller for frequently traded Treasuries, but they can get quite high for less liquid bonds.

Nonetheless, an advantage of individual bonds is that a mark-up on purchase is only a one-time expense, and there are no ongoing fees as are charged on a bond fund.

4 Comments

  1. […] How To Buy Individual Bonds by Wade Pfau via Retirement Researcher […]

  2. […] How To Buy Individual Bonds by Wade Pfau via Retirement Researcher […]

  3. […] How To Buy Individual Bonds by Wade Pfau via Retirement Researcher […]

  4. Weekend Reading: Just Buy Everything | RIA on March 19, 2017 at 12:52 pm

    […] How To Buy Individual Bonds by Wade Pfau via Retirement Researcher […]

Leave a Comment





Retirement Researcher is a SEC registered investment adviser. The content of this publication reflects the views of Retirement Researcher (RR) and sources deemed by RR to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.

The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. RR only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.