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Unlike in most markets, the prices being asked for bonds aren't always clear. (Stockbyte/Stockbyte)
Unlike in most markets, the prices being asked for bonds aren't always clear. (Stockbyte/Stockbyte)


The murky world of bond pricing Add to ...

If I want to buy General Electric stock, I can find out the price at that instant to buy or sell that stock. It will be the same for any investor around the world.

But if I want to buy a General Electric bond, the price is a bit of a secret. And the bond traders like it that way. How else can they make a lot of money on a trade?

Just in case you are wondering, the bond market is much bigger than the stock market globally. On an individual level, if you are a conservative investor, and have only 35 per cent of your investments in stocks, that potentially leaves an awful lot tied to the bond market. That is why this is very relevant to you.

Let’s take an example: You want to buy a GE Capital Canada 5.1-per-cent, June 1, 2016 bond. According to GlobeInvestor, the bond closed at a price of $109.30 on March 14.

If you want to buy this bond, you might go to your online brokerage account and put in an order to buy it. Of course, the brokerage must actually have the bond in its inventory – not unlike a store needing the product to be on the shelf. If they don’t have it in inventory, you can’t purchase it.

Assuming they have it, they may sell it to you for, let’s say, $110.15. Since you have no access to intraday bond prices, you might have to assume the price went up today.

Let’s say you buy $11,015 worth of the bond. The broker kindly includes the commission in the quoted price.

If you could have bought the same bond at the same time somewhere else for $109.65, then you just paid a $50 commission. That’s a lot higher than a $9.99 stock trading commission.

The reality is that if you bought that bond at that time from RBC, TD, Cannacord, National Bank or any other dealer, you would have received differing prices. The price would likely have been anywhere from $109.50 to $110.25.

The consumer faces the same pricing issue on bonds whether they trade themselves through an online brokerage or with a full-service broker at one of the bank-owned firms. The firms end up trading bonds through their own retail bond desk.

If you were an institutional trader (usually a pension fund or mutual fund) you would have skipped the retail trading desk, and gone to an institutional trading desk. There you would get better pricing, which, depending on the institution, would have ranged anywhere from $109 to $109.60. (These numbers are approximations based on actual pricing reviews.)

The key point is that at the same time for the same bond, the price one person pays can be different than what another pays. And if you sell the bond, you will face the same issue. In other words, if you’re not getting the best prices, you could potentially lose more than 2 per cent on your overall return – and you would never know.

One company that aims to help with this is Perimeter Markets, with its CBID service. This is an online, fixed-income marketplace that provides investors with access to information about the best offer prices and yields for Canadian bonds from the six investment dealers who participate in its market. At the CBID retail website, investors can view the daily closing price for 800 bonds ranging from federal, provincial and municipal government issues, to corporate and strip bonds. While it helps to know what the best prices are, it doesn’t give you access to making trades at those prices.

Despite efforts to improve the system, there has been very little progress in getting the retail bond investor a fair deal. In the world of fixed income, it’s still the dark ages.

Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.

Follow Ted on his blog at The Canadian Financial Planner.

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