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On the bond wagon
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November 8, 2001: 7:00 a.m. ET
Bonds are easier to buy than ever before -- if you know how.
By Walter Updegrave
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NEW YORK (CNNmoney) - A little over a year ago, only wimps would admit to owning bonds. But with stock prices stagnant and the economy wobbly, even diehard stock fans have begun snapping them up. Bonds have gone so mainstream that they're being touted by celebrities.
Wild-and-crazy guy Steve Martin has been doing radio spots for Merrill Lynch advising investors to diversify into bonds. "If you're embarrassed," confides Steve, "just call them fixed-income securities. It's way more impressive." And a recent Fleet Bank TV commercial shows New York Yankees shortstop Derek Jeter researching a bond fund online. Can the Madonna Muni Bond Tour be far behind?
Good timing
Fortunately, this urge to bond with bonds comes at an opportune time. For years, the bond market operated like a cozy club where dealers had a monopoly that allowed them to peddle bonds at bloated prices. But that's changing as the Internet casts cleansing rays of light into this once murky world.
Today an expanding roster of Websites provides bond market analysis and recent prices and yields on many bonds and bond indexes. Even more important, at some sites you can sift through databases of thousands of bonds, searching for issues that meet your needs. And in a further move to democratize the bond market, a handful of corporations have begun issuing bonds designed for the needs of individuals rather than big institutions.
Result: Today's bond market is a brighter place, where you can buy individual issues more easily than ever before and -- this is really revolutionary -- have a decent shot at getting them at competitive prices and yields.
One caveat: bonds can get pretty damn complicated. Unless you're willing to devote the time and effort to research individual issues -- and monitor them afterward -- I'd definitely recommend sticking to funds.
Similarly, bond funds, with their dividend-reinvestment option, are usually a better choice if you plan to plow back interest payments into additional bonds rather than live off the interest income.
There's no single threshold at which individual bonds are a better deal than bond funds. But I'd say don't even think of buying individual issues unless you're investing $10,000 to $20,000 in Treasuries and corporates. And since munis are rarely sold in less than $5,000 or $10,000 lots, I'd say you need at least $25,000 to $50,000 before it makes sense to accumulate your own muni portfolio. Keeping those guidelines in mind, here are three bond options to consider.
The Treasury solution
The simplest and cheapest way to build your own bond portfolio is to buy U.S. Treasuries directly from the federal government through its TreasuryDirect program. For one thing, you don't have to worry about credit risk, or what I call deadbeat risk. And by signing up for TreasuryDirect, you can buy newly issued two-, five- 10- or 30-year bonds in amounts as small as $1,000. No need to write a check.
Uncle Sam will deduct the purchase directly from your bank account, if you wish -- and even automatically reinvest the proceeds of maturing bonds into new ones. The fee for all this: zilch, as long as your account balance is less than $100,000, at which point you'd owe just $25 a year.
When you buy through TreasuryDirect, you are bidding in a government auction along with huge bond dealers like Bear Stearns and Salomon Smith Barney. If you like the notion of duking it out with the big boys, you can submit a competitive tender, which means you specify the number of bonds you want and the yield you'll accept.
I don't recommend this, though. If you aim for too high a yield, your bid won't be accepted. So unless you follow Fed chairman Alan Greenspan's every convoluted comment about the economy, submit a noncompetitive tender, which ensures that you get your bonds at the "market clearing yield" -- that is, the highest yield at which competitive bids were accepted. For details on TreasuryDirect and a schedule of auctions, call 800-722-2678 or go to the TreasuryDirect website.
Mining for munis
As recently as a few years ago, your choice in muni bonds was often limited to whatever issues your broker happened to have in inventory that day. But today a number of discount brokers and other online bond purveyors allow you to peruse hundreds, even thousands, of munis online, complete with their recent offering prices and yields.
Even better, you can usually search their databases using such criteria as the bonds' credit quality, number of years to maturity and current yield. For example, when I recently visited the MuniDirect website and screened for five- to 10-year munis issued in Florida rated AA or AAA (the two highest credit-quality ratings), currently yielding 4 to 5 percent (the taxable equivalent of 5.7 to 7.1 percent for anyone in next year's 30 percent bracket), I got a list of 59 issues meeting my criteria.
Most sites give you the option of customizing your search even more by, say, weeding out certain types of bonds. Many investors avoid callable munis, for example, because the issuer may call the bond, or repay its principal early, if interest rates have fallen since the bond was issued. Such calls force bondholders to reinvest their money at lower rates. So if you want to lock in an attractive yield for a bond's full term, you can specifically exclude callable bonds from your search.
Another neat feature of these search engines is that they can help you tell whether the price quote you've gotten at a particular site -- or for that matter from a flesh-and-blood broker -- is really a decent deal. For example, by going to the search engines at several sites and plugging in a bond's cusip (a unique ID tag carried by each bond issue), you'll be able to see whether other firms are selling the same bond and, if so, what price they're charging.
Be careful, though. In the bond world, even something as simple as comparing prices can get confusing. While some of the prices on these websites are "live and executable" -- that is, you are assured of getting the bond at that quote -- many are "subject" prices -- subject, that is, to the bond's still being available from a dealer at the quoted price. So a super-low quote may reflect not a bargain but a price that hasn't been updated.
There's another complication. Most bond prices include the broker's markup, or profit, which means the price you see is the price you pay. But that's not always the case. Vanguard Brokerage Services, for example, adds its markup to the prices on the site when you place an order. Similarly, discount broker CSFB Direct adds a commission to its prices. So you want to be sure the quotes you're comparing include all charges and, of course, represent the current price of the bond. Hey, I warned you that buying bonds is no stroll in the park.
New deals in corporates
As with munis, you can screen for corporate issues at many sites. But the more compelling development is that a small but growing number of companies have launched programs to sell "direct notes" -- that is, new bond issues marketed to individuals rather than to institutional investors. These bonds go by a variety of different names -- Bank of America InterNotes, Freddie Mac FreddieNotes, GMAC SmartNotes. But what all these notes have in common is that they take some of the complexity out of buying corporate bonds.
They do this in several ways. First, they allow you to buy individual issues with as little as $1,000. Second, the bonds are offered to the public during week-long "open order" periods during which every investor pays the same price -- $1,000 per bond -- and gets the same yield.
There are no additional markups or commissions, so you don't have to worry that you could have gotten a better price by shopping around at several different brokerage firms. Once the open period ends, of course, the prices and yields of these bonds bounce up and down with interest rates, just like all bonds.
Finally, while most corporate bonds make interest payments twice a year, many bonds in these programs pay interest quarterly or monthly -- a real plus if you're counting on interest income for living expenses.
Ironically, despite the "direct" moniker, you don't buy these bonds directly from the company. They're sold through brokerage firms, including some discounters, such as Fidelity and Schwab. You can also sign up for e-mail alerts about upcoming issues at the Direct Access Notes website.
So there you have it, bond fans, three ways to build a bond portfolio. As you can see, buying individual issues is easier than ever before. Then again, I understand if you decide it's easier still just to stick with bond funds. 
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