Learning Bond Market Trading

Bond market trading is a multi-trillion dollar operation that attracts a very broad spectrum of investors. For those who purchase and hold bonds to term, the market is secure and stable. Bonds are commonly given as gifts, particularly for children. Those who buy and sell bonds before maturity dates, however, are exposed to different range of risks.

Basics of Bond Market Trading

Bond market trading involves the trading of bonds prior to their maturity date. The value is contingent upon changing interest rates. As rates climb, older bonds fall in value, due to the higher rates of newly issued ones. When interest rates fall, however, the value of existing bonds rises. Investors study a range of economic indicators to determine where they believe interest rates will head, and how best to handle their bond trading.

The bond market in the United States is comprised primarily of corporate, mortgage, municipal, and government bonds. You can also invest in agency and asset backed bonds. These bonds are not traded like stocks on an open market. Instead, they are bought and sold through bond dealers.

 Bond Terminology

If you are interested in becoming involved in bond market trading, you should be familiar with a few terms. A coupon refers to the percentage of interest to be paid on a bond during a year. The maturity date is the date at which the bond will be paid off. A bid is the price that a trader may be willing to pay for a bond, while the offer is the price that a trader is willing to sell a bond. The bid-offer spread is the difference between these figures.

Becoming involved in bond trading requires different knowledge and a different skill set than typical stock market trading. As in any investment, it is important to know your risks, and hedge properly against them through appropriate means. Bond market trading can be quite lucrative, once you learn how it works.

Buy Bonds Online For Less

When people think of online investing, they probably do not think about how to buy bonds online. The danger of investing in stocks inspires the imagination a little more than bonds, their much safer cousins. However, purchasing these financial instruments online is often cheaper than buying them elsewhere.

Buy Bonds Online in Four Steps

First, you will have to open an online account with a broker who handles bond trading. They will typically require you to deposit $5,000 or more in order to get started. You can do this by mailing a check or making the deposit online.

Then you will need to determine what kind of bond you want to buy. While stock trading sometimes involves split-second decisions and quick reactions, when you buy bonds online you engage in a much more relaxed activity. Spend some time making the right choice. Investigate yields and other aspects of bonds to ensure that you get the most out of your investment. High yields mean that you will make more money when you redeem the bonds.

Third, determine how much you will pay your broker in commissions when you buy bonds online. This has an impact on your returns. Brokers often incorporate their commission into the price of the bonds.

Finally, inform your broker which bond you want to buy. The transaction will take a short period of time while the broker determines that you have sufficient funds to make the purchase. After the brokerage does this, it will buy the bonds. You will usually receive some sort of notice in the mail as confirmation of the purchase several days later.

Now you can sit back and enjoy the knowledge that your money is safely invested. Your money will not generate fantastic returns like some stocks might. However, when you buy bonds online, you guarantee a modest return with a safe investment.

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Identifying the Best Bonds to Invest In

Naturally, maximizing yield must be the overriding objective when seeking the best bonds to invest in. Like other negotiable securities, bonds are very diverse. Fullcomprehension of bond fundamentals and one’s personal investment profile are perfunctory for profitable bond investing.

Bond basics: Best Bonds to Invest In

An apt adage posits, “Your word is your bond.” This philosophy has equal truth as a financial concept as it does in personal and social contexts. All bond-based financial instruments essentially boil down to a promise to pay a specific minimum sum by a certain future date. Buying a bond essentially equates to becoming a creditor of its issuing entity.

Much more is at stake in bond investing than lending a friend $5 to tide them over until tomorrow, however. Investment bonds require much larger initial outlays of  $50 or more. Moreover, instead of a friend’s informal promise to repay some small amount, bond-based securities represent formal pledges to pay much bigger sums——months, years, or decades later.

“Know Your Borrower”

The above advice should serve as both guidepost and road map to the best bonds to invest in.

–  Investigate credit ratings of best bonds to invest in.

Fitch, Moody’s, and Standard & Poor’s (“S&P”) comprise roughly 95% of the entire international bond-rating market. Each has established distinct rating criteria and grading systems to assess and express bond issuers’ relative creditworthiness.

–  Personal profile and investment style.

Evaluate your own financial circumstances realistically. Accurately ascertain how much you can afford to risk and your true bond investment motivations. For instance, US Savings Bonds might be appropriate for long-term goals like the kids’ college. Although yields are relatively low, available tax-exemptions and issuer stability make such bonds very worthwhile investments.

Conversely, those seeking major short-term gain might find high-yield corporate bonds more appropriate. Higher associated risks have correspondingly higher rewards. As illustrated above, finding the best bonds to invest in for you is a highly personal matter that mandates analyses of several significant factors.

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Why You Should Get The Best Fixed Rate Bonds

When you are young, the success of your portfolio probably does not depend on possessing the best fixed rate bonds. As you get older, your investments should become more conservative and move away from riskier stocks.  However, this does not mean that you should accept lackluster performance from less exciting bonds as you near retirement. It is possible to generate decent returns form your investments even as more of them become bonds rather than stocks. The bets fixed rate bonds will help you do more than just eke out a living while you are retired. They can help you continue to improve your portfolio even after you have left active trading.

Qualities Of The Best Fixed Rate Bonds

The best fixed rate bonds for you will depend on your own needs and plans. These bonds have various durations. If you do not plan to touch certain funds for a long period of time, you can get bonds that have five-year plans. The interest rate on these bonds will go as high as almost five percent at the present time.

If you think that you will need access to certain funds in the near future, the best fixed rate bonds for you may have shorter durations. There are bonds that return fixed rates over periods as short as six months. The interest rates on these bonds are lower, closer to three percent in most cases.

Provided that you have a significant amount of money with which to invest, the wisest course of action is to invest in a variety of fixed rate bonds. This allows you to leave a certain amount of money generating interest while other funds remain more immediately available. The best fixed rate bonds are really a selection of different bonds.

The Purpose Of An ERISA Bond

An ERISA bond originates from a federal law passed in 1974. The Employee Retirement Income Security Act created standards that financial advisers had to follow when managing private pension funds and health care plans. The officials in charge of such plans must be covered by ERISA bonds, which will financially cover losses in case the officials commit fraudulent acts or otherwise engage in unethical behavior with the funds in these accounts.

The Qualities Of An ERISA Bond

ERISA officials must pay for their own bonds or arrange for their payment some other way. They can buy them from most major insurance companies. The premiums on these bonds depend on the region and the seller. Generally, they cost around $200 per year.

An ERISA bond must possess coverage for a certain amount of money in comparison to the size of the fund handled by the covered official.  The minimum amount permitted is ten percent of the total fund. This can result in coverage of no less than $1,000. Depending on the exact type of fund handled by the ERISA official, the maximum limit of the bond is either $500,000 or one million dollars. The latter amount is the maximum for plans, which invest in employer securities.

Contributors to plans covered by an ERISA bond should remember that these bonds are not forms of insurance. If an official mishandles several million dollars and loses it all, his or her bond will only pay its stated amount. The purpose of the bond is not simply to protect the contributors. It also protects the official from possible prosecution that may be threatened after an act of carelessness rather than criminal intent. An ERISA bond is also a way to protect contributors to pension plans from fraud.

Tools to Help With Buying Bonds Online

Investors may not realize that there are many tools that can help them with buying bonds online.  Many online brokers offer plentiful information about buying bonds online and allow bonds to be purchased online through their websites, which has made the process of buying bonds online relatively simple and affordable.

For example, TD Ameritrade provides the following powerful tools to assist investors with buying bonds online by helping investors find fixed income bond products that meet their specific bond investing criteria.

• Bond Wizard — Investors answer five simple questions using Bond Wizard to find bonds suited to an investor’s specific investment goals.
• Bond Ladder Tool — Investors can use the Bond Ladder Tool to build a bond ladder based on an investor’s specific goals and criteria.  A Bond Ladder is a portfolio of bonds in which each bond has a different maturity date to allow the bond investor to space out future bond investments to take advantages of changes in interest-rates and provide liquidity.
• Ready-Made Ladders — Ready-Made Ladders are pre-designed bond ladders that are provided by online brokers that include bonds in a specified maturity range and quantity that an investor can select.
• Advanced Search Function — Specific bonds can be found via an Advanced Search Function that can look up bonds by name or CUSIP (Committee on Uniform Securities Identification Procedures) number, which is a unique identifying number associated with each bond.

Buying Bonds Online Is Easy

Prior to making an investment in bonds, proper due diligence is required to determine if a bond investment is suitable.  The Internet has made obtaining current and accurate information about bonds readily accessible to all investors interested in investing in bonds.  A number of websites on the Internet offer free investment advice and information regarding buying bonds online, including www.bondsonline.com and investinginbonds.com.  A great amount of information about bonds can be found on these websites, including bond ratings, bond maturity dates, bond interest rates, and general bond investing advice.

With many online brokers, buying bonds online is as easy as buying stocks online.  The bond purchase order is entered online by an investor in a similar manner as a stock purchase order is entered.  Upon acceptance by the online broker, the order to buy bonds online is executed by the online broker.  The bonds are then held in the investor’s brokerage account, unless delivery of the bonds is requested.

United States Treasury Bonds (government bonds) can be purchased online directly from the United States Bureau of the Public Debt at their website (www.savingsbonds.gov or www.treasurydirect.gov).  A wide variety of United States Treasury Bonds with various maturity dates and interest rates are offered.  Payment for United States Treasury Bonds can be made via credit card or bank debit card.

Researching and buying bonds online is easy via the Internet.  It is important to remember that investments in bonds are made as a long term investments, with the objective of earning money from the interest that the bonds pay over the life of the bond.  Before buying bonds online, it is important to research what bonds are available for purchase online and their credit rating to find bonds that are suitable for an investor’s investment goals.

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The Outlook for Bonds In 2012 Is Uncertain

The Outlook for Bonds In 2012 is more uncertain than usual because investors who were frightened by the sharp drop in the stock market in 2008 and 2009 have invested their money heavily into bonds in recent years, which has caused highly rated bonds and bond funds to trade at elevated values in recent years.  Clouding the outlook for investing in bonds in 2012 even further is the fact that municipal bonds and municipal bond funds are currently trading at depressed levels due to concerns about municipal bond defaults.  The divergent trends in highly rated bonds and municipal bonds may continue or reverse during 2012, which are important considerations for investors considering investing in bonds in 2012.

The state of the United States economy in 2012 will determine how bonds perform in 2012.  With the European debt crisis ongoing, an apparent slowdown in parts of Asia, and economic indicators in the United States flashing mixed signals regarding the future of the United States economy, there is a lot more uncertainty regarding the outlook for bonds in 2012 than there is during a typical year.  An economic recovery in 2012 will allow bonds to revert to their historical norms, which will affect investments in bonds in 2012.  An economic recession in 2012 will likely continue the already present distortions in the bond markets, as investors continue to buy and hold onto highly rated bonds and bond funds, and municipal bonds suffer from worries about whether the government authorities that issue municipal bonds can pay the interest on the bonds.

Strategies for Investing In Bonds In 2012

With stock markets approaching another bear market, many investors are considering investing in bonds in 2012 for the relatively safe returns that they offer via interest payments.  However, due to the currently skewed valuations and trading levels for bonds and the uncertain economic outlook for 2012, investing in bonds in 2012 is not the typical “safe haven” investment that investors have come to expect from bonds.

The outlook for investing in bonds in 2012 is different than bond investing is in normal times due to the fact that highly rated bonds and bond funds are trading at elevated prices.  Once the bond market returns to a more normal trading level, when the economy makes a sustained economic recovery, the elevated highly rated bonds and bond funds will lose some of their principal, as investors sell their bonds to seek out higher returns in the stock market.  Based on the currently elevated levels that highly rated bonds and bond funds are trading at, they could lose as much as 20% of their principal value in 2012.  Although this might not happen in 2012, since bond investments are long term investments, this must be taken into consideration as a risk factor when buying highly rated bonds and bond funds in 2012.

Junk bonds are an option to consider for those looking to invest in bonds in 2012.  Much of the premium in the price junk bonds has already disappeared, as the United States economy appears to be entering a recession.  Junk bonds typically do not do well during a recession because the companies that issue junk bonds are financially distressed, and their survival and ability to pay interest on the junk bonds that they have issued is a big risk factor that decreases the price of junk bonds and junk bond funds during a recession.  For more information about junk bonds, see:  The Junk Bond Market Offers High Yield Returns.

Municipal bonds are usually considered one of the safest bond investments, due to the issuing local, county, and state government’s ability to raise taxes and cut expenditures to pay interest on the municipal bonds that they issue.  However, investing in municipal bonds or municipal bond funds in 2012, while attractive since many are trading at depressed levels, will carry a much higher risk of default in 2012, if the United States economy is in a recession during 2012.  After years of budget cutting and revenue increases, local, county, and state governments may not be able to pay interest on some of their municipal bonds during a severe recession in 2012.  For more information about municipal bonds, see:  Municipal Bonds Offer a Safe Way to Earn Tax Free Income.

Investing In Bonds In 2012 is fraught with distortions and risks that are not present in a typical year, and therefore, investors need to look closely at what kind of bonds or bond funds they are thinking of investing in during 2012.  Many market forces may impact bonds in 2012, and these market forces must be taken into consideration by bond investors.

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How Municipal Bonds Interest Rates Work

In order to understand how to profit from municipal bonds interest rates, you need to understand how bonds work. A bond is essentially a debt obligation that governments issue. They do this in order to raise money for government operations. It is an alternative to taxation.

A lot of people are familiar with Treasury bonds, which are issued by the federal government. When the federal government issues these bonds, they receive money from the purchasers and generate income. However, they have to pay back those bonds at the end of a predetermined period along with the interest, which may have been paid out during the course of that time period.

Municipal bonds are different because they are issued by local governments. However, they serve essentially the same purpose for a city as federal bonds do for the government in Washington, D.C. When a bond reaches its maturity date, the local government entity will have to pay you back the full amount of the money you paid, as well as interest.

Municipal bonds interest rates are not very high. You cannot make as much on municipal bonds, or any other kinds of bonds, as you might when you invest in a stock or a commodity that suddenly breaks out and significantly increases its trading value. However, people are still drawn to municipal bonds because of their safety. The local government guarantees the interest and the return of the money when the bond reaches its maturity date. During volatile times in the market, investors often switch their investments to bonds in order to store their money until the market settles.

Possible Drawbacks to Municipal Bonds Interest Rates

There are drawbacks to seeking safety in municipal bonds interest rates. If the market suddenly improves and you see opportunities for great investments, the money you have placed in bonds is locked in and you will have to accept the low-interest rate until the bonds mature. Furthermore, while many bonds are tax exempt, some are not. Municipal bonds interest rates can also have an impact on whether or not you are subject to the Alternative Minimum Tax.

Exchange Traded Bond Funds Are More Exciting

Bonds have teamed up with ETF’s as exchange traded bond funds. This new financial instrument provides investors with the exciting possibilities of ETF’s while maintaining the reliability and safety found in bonds. Furthermore, these new funds add some transparency that has always been lacking in typical bond funds.

At first glance, an exchange traded fund looks like a mutual fund. The big difference is that investors can trade exchange-traded funds just as if they were regular stocks. This financial instrument has been around since the early 1990′s. The idea of an exchange traded bond fund is a little more revolutionary, but it is starting to acquire a lot of popularity with investors for a variety of reasons.

Bonds have always suffered a boring reputation. They are reliable investments if you are not looking to make a lot of money fast. Investors often retreat into bonds when they feel that the market as a whole has become unstable. They park their cash in bonds and more reliable stocks while they wait for investment opportunities to reappear.

Diversification With Exchange Traded Bond Funds

The advent of exchange traded bond funds has altered that reputation somewhat. These new financial instruments have combined the reliability and safety of bonds with the diversification of exchange-traded funds and the trading convenience of stocks. Investors do not have to wait until the maturity date for their bonds. Instead, they can trade these funds daily on the stock market.

This kind of fund provides great, new alternatives for investors in a fluctuating and volatile market. It is no longer necessary to make a long-term retreat to bonds with much of your money. Instead, you can invest in exchange traded bond funds, which provide safety as well as the convenience of mobility when circumstances in the market suddenly improve.

The Exciting Combination In Bond Exchange Traded Funds

A new financial instrument has appeared in the form of bond exchange traded funds. This innovation teams exchange-traded funds with bonds and combines their best qualities. In addition, these new funds add transparency to bond investments, which makes these exchange-traded funds an improvement over the old way of investing in bonds. 

Bond exchange traded funds appear to have much in common with mutual funds. They are, in fact, the source of the idea for exchange-traded funds. Exchange-traded funds differ from mutual finds primarily in their ability to be traded on the market exchanges, just as if they were stocks. Bond exchange traded funds share a similar distinction. They have many of the qualities of bonds, but investors can trade them as if they were stocks.

Bond exchange traded funds have done much to enhance the reputation of bonds. These government-issued debt obligations have always been viewed as boring but safe. When the market is unstable, many investors will place a larger-than-normal portion of their cash in bonds. This prevents them from suffering from negative fluctuations in the market but it also prevents them from using those funds to invest in sudden opportunities presented by stocks that are due to break out. 

A New Option With Bond Exchange Traded Funds 

Bond exchange traded funds have changed bonds’ lackluster appearance. These new financial instruments offer investors the safety of bond investments without the accompanying immobility of their money. Bond ETF’s present a new option for investors seeking refuge from a volatile market. They can invest in these funds without getting tied down for long periods of time. If the market makes sudden improvements, as it tends to do, then they can move their money much more easily back into stocks. Bond exchange traded funds also present a transparency that bond investments always lacked in the past.