Buying TIPS On Secondary Market, Part 5: How to Buy

18 Comments on Buying TIPS On Secondary Market, Part 5: How to Buy

Steve on January 19, 2009 | permalink

 

Nice presentation. I am about 5 years from retirement so followed the BH's threads for awhile. Several weeks ago investigated opening a ROTH brokerage acct at Fidelity but, if I recall correctly, they have a $100 acct close-out fee, so if they raise their commissions and I decide to bail for another provider, it'll cost an extra $100, which long-term is nothing but short-term could be a hefty hit.

Steve on January 19, 2009 | permalink

 

Today, on-line, I checked Fidelity's IRA close-out fee, which shows "Close Account $50 per account for Fidelity IRAs." http://personal.fidelity.com/accounts/pdf/FBS-BKCOMMSCHED-0105.pdf.
But, although I have not located my notes from my call to Fidelity several weeks ago, I'm still pretty sure they said $100 to close out a Fidelity IRA. I wonder if the two bits are info are consistent because to establish a ROTH at Fidelity, one would need a cash "acct" as well as the "acct" holding the TIPs (2 x $50)?

TFB on January 19, 2009 | permalink

 

Steve – If you open a Roth IRA with Fidelity, you will only have one account.

Steve on January 19, 2009 | permalink

 

Thx for the quick response. I have a lot of "catchup" filing-of-paperwork to do today and hopefully I'll come across my note from the $100 Fidelity phone call and then I may call them again re the discrepancy between it and their on-line posting.

HueyLD on January 31, 2009 | permalink

 

Hi TFB,
I am glad you emphasized that for retail investors, the markup is the largest cost and the commission is only a small cost in buying bonds on the secondary market. I heard the phrase "no commission trades" way too many times and wish we could outlaw its usage without full disclosure of the total trading costs.

The part on phone order versus online order illustrated the above point well. $20 or so in commission can potentially save an investor a lot more in the spread cost. Thanks for this piece of high quality and very educational materials.

JustAsking on February 10, 2009 | permalink

 

TFB,

Great article–thanks! I just posted this exact question (bond commissions vs. markups at various brokers) on the Bogleheads site and got no answers, but someone referred me here. It's exactly what I wanted to know. Even the well-known bond books don't clarify this.

One note: in the first table above, I think Fidelity's minimum fee for online trades should be $8–it doesn't seem to be included in the markup. They say this: "For fixed income trades to which concessions apply, minimum charges will vary based on channel: $8.00 for on-line trades and $19.95 for rep-assisted trades." http://personal.fidelity.com/products/incomesolutions/index_content.shtml.cvsr?bar=c . The pdf rate sheet you link to above is unclear about this–looks like they didn't proof it carefully.

Steve, if you're still around, I moved IRAs from Fido elsewhere (and may be moving them back), and I asked them to take the fee out of my brokerage account rather than the IRAs, but they wouldn't do it (or can't legally). I recall that it was $50, but they may have raised it.

TFB on February 10, 2009 | permalink

 

JustAsking – I'm pretty sure there is no $8 charge on online orders for Treasury bonds including TIPS. You can call Fidelity customer service to confirm. "Concessions" do not apply to Treasurys.

JustAsking on February 10, 2009 | permalink

 

Right–I was thinking of munis, to which it does apply (and corporates). Thanks.

JustAsking on February 11, 2009 | permalink

 

TFB,

You mention above that you requested quotes from those brokerages within a few seconds of each other. Is there a way to do it online, or do you have to call them? If I go to the Vanguard or Fidelity bond pages, for example, I don't see any way to do it online.

Also, in another post, you give Fidelity the TFB award for best bond brokerage. No question, they do a good job. However, even if they were consistently less expensive, I wonder if that would be outweighed by the fact that Vanguard's money market funds have better rates and lower expenses? Presumably bond dividends would go into a sweep fund until you had enough to buy another bond, so over time, might the extra income earned at Vanguard compensate for a possibly slightly higher initial bond cost?

The difference can be as much as 1%–for example, between VMSXX and FMOXX today (.95%)–although it can also be negligible. But at Fido, it seems to go into negative territory more often (after expenses), which means we're paying them to hold our money.

JA

TFB on February 11, 2009 | permalink

 

JustAsking – Yes, it's possible to get a quote online, especially when you have an account with them and when the market is open. That's how I did it. If you are talking about a taxable account, since you compared tax exempt money market funds, you can transfer the cash elsewhere after the interest is paid, if the difference in money market fund is material to you. For taxable money market funds in a tax deferred account, the difference isn't that big. Therefore I don't think it's a big deal.

JustAsking on February 11, 2009 | permalink

 

TFB,

On looking into this further, I realized you were comparing the online quotes from the BondDesk or proprietary software–I had thought maybe you were contacting them for an actual quote (which I understand can sometimes be lower). I see that in many cases the prices are the same, and where they aren't, in the half dozen or so examples I tried, it was a tossup between Vanguard and Fido for munis and agency bonds after adding the commission–each one was cheaper about half the time.

Oddly, Vanguard seems to have more bonds overall according to the numbers shown, but when I took some CUSIPs from Fido and searched for them in Vanguard, several of them didn't show up. For munis, Vanguard seems to have the larger issues but not the ones from smaller municipalities, although this may be an oversimplification.

And on the question of interest, you're right. For a $10k bond paying 5%, the interest would be $500 a year. If Vanguard's rate was 1% better, that would be an additional $5 a year. So you'd have to hold the bond 14 years to make up for a $69 higher cost–even if it were always that much higher, which it isn't. But overall, as you point out, it probably doesn't matter.

This has been very stimulating and helpful–thanks for the post and the followups!

JA

JustAsking on February 11, 2009 | permalink

 

… actually (sorry to monopolize the comments), now I'm finding that for my state, Vanguard has quite a few bonds that Fido doesn't, particularly at the upper end of the yield range, but many of them are on the risky side–e.g., airport construction. Wish there was some way to get a handle on how each brokerage decides which bonds to include or exclude.

Steve on February 14, 2009 | permalink

 

JustAsking, Sorry, I don't "get out much" on the web, so I just saw your post directed to me. After posting here, I did find my notes reflecting that the Fido rep told me $100 to close a ROTH there, so I called them and they said $50, which is what their on-line doc said. I haven't done anything yet. I think someone over at Bogleheads said a couple of weeks ago that Vanguard may be taking some steps to be more competitive and my wife & I have almost reached Voyager status there (more of our money is at TIAA-CREF due to a couple of legacy contracts from when I taught college). I don't mind some complexity on our accts but prefer, other things being roughly equal, to keep it simple. Bottomline: Inertia has set in some and I haven't moved on this yet. Steve

Oleg Orel on July 21, 2009 | permalink

 

Question about tips:

Two bonds matures in 2029,

- 1st: 3.85 Coupon, Yield to maturity 2.2%, Price 123 (Abjusted price 161)
- 2nd: 2 Coupon, Yield to muturity 2.18%, Price 97 (Adjusted price 103)

What is pros/cons of high coupon vs high price?

TFB on July 21, 2009 | permalink

 

Oleg – Those two bonds have similar yield to maturity. I would prefer the 2nd, with a lower coupon, which has lower reinvestment risk.

Oleg Orel on July 21, 2009 | permalink

 

Thanks FTB, it was my filling too, but rather than seeking advice for particular case, I would be interested to hear what are pros and cons when you choosing between such spread apart bonds with similar yield. In one case you pay upfront huge sum, but have big coupon (flow back) to reinvest, in other case almost zero price, and thiner flow. In what scenarios should I chose either one? Also, if I hold it till maturity, I do not care most likely which one to buy, but If I have to sell it before, what is better choice and why?

TFB on July 21, 2009 | permalink

 

If the yields are similar, I would always prefer the bond with lower coupon, for lower reinvestment risk. If you have to sell it before maturity, because other investors also prefer it, you may get a better price for it when you sell. It becomes more difficult if the yields are not similar. How much is the lower reinvestment risk worth? 2 bps? 10 bps? 20 bps? It's hard to say. After all everybody knows about the reinvestment risk. The market has set the price. I don't think you can make a case that the market is wrong. Don't sweat it.

Andy on September 28, 2009 | permalink

 

I've been looking into these of late as a way of diversifying and protecting my portfolio and given they are returning 1.6% above treasuries, they seem like a must have for any diversified portfolio.

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