Buying Corporate Bonds Online
July 25, 2007
Corporate bond buyers began buying corporate bonds online in the late 1990s with online brokerage firms who offered up a grocery superstore of offerings with low commissions. Instead of relying on a broker or brokerage firm touting specific bonds and issues that their firm held in-house, individual investors had the option to use their online broker to research offerings and in theory receive better pricing. While certainly online purchasers of corporate bonds have been spared the sales pitch of their broker, we question the amount of money saved by buying online. A look at today's offerings on a major online brokerage firm's trading site revealed:
Bids to sell corporate bonds:
Toyota Motor Corp (Aaa/AAA)
Due 10-20-2009
priced to yield 5.44%
Proctor & Gamble (Aa3/AA-)
Due 9-15-2009
priced to yield 5.30%
Bankamerica Corp (Aa1/ AA)
Due 2-15-2009
priced to yield 5.41%
Bids to buy corporate bonds:
Goldman Sachs Group (Aa3/ AA-)
Due 1-15-2009
priced to yield 4.46%
Wells Fargo and Co. (Aa1/ AA+)
Due 4-1-2009
priced to yield 4.52%
General Electric Cap Corp (Aaa/ AAA)
Due 9-15-2009
priced to yield 4.61%
Taking a look at those bids leads us to conclude that the individual investor is paying a very nice spread to the online broker for trading in corporate bonds. In fact, we have to note that the spreads between bid and ask prices appear wider than those offered in brick-and-mortar brokerage firms. While part of the large spread is certainly the convenience of purchasing corporate bonds in smaller denominations, we still suspect that the online brokerages firms are making a tidy sum on the online trading of corporate bonds.
