Wednesday, February 1, 2017

BOND ORDER BOOK DIFFERENCES: Interactive Brokers, Fidelity and Vanguard

To highlight a problem in the bond market, which lacks a uniform trading system like the stock market, I opened up three of my accounts where I buy corporate bonds and checked the ask prices for a 2.25% Public Service of Colorado First Mortgage Bond maturing on 9/15/22. 

FINRA Page: Bond Detail (prospectus linked at FINRA Page)

My one bond purchase this morning is shown in the trade section. 

YTM at Total Cost (98.252) =  2.587%

This is another return of my money purchase. My trade was the first one today. 

I already own one of those bonds, but have not go around to discussing that purchase. I bought another one this morning in a different account. 

I first looked at the Vanguard Order Book: 

The best ask was at 98.315. A total of 546 bonds were available at that price but the minimum order was 10 bonds.  I did not want 10. I wanted just 1. The best price for 1 bond was 98.648 and up to 500 bonds were available at that price. 

I next opened the Fidelity Order Book: 

The best price shown was 98.239 requiring a 10 bond minimum. The best 1 bond ask price was 98.25. 

I then went to IB which quoted me 28.15 for 1 bond. I entered an order slightly above that price since IB will warn me when my 1 bond order is not going to be sent to the right exchange.  I bought 1 more bond and paid 98.152: 

The IB commission is the same as Fidelity. 

I do not use any of my other brokers due to higher commission rates. 


  1. I am continuing to expand the Short Term Bond/CD ladder Basket, focusing recently on adding to clusters in the July/August 2017 and December 2017/January 2018 time periods.

    I am increasing the intermediate bond basket in tandem at the general rate of $1K per every $10K added in the short term basket which now extends through February 2020. The concentration remains in the June 2017 through December 2018 time period.

    There are a variety of electric utility mortgage bonds that can be bought in the bond market. The first mortgage bond maturing in 2022 discussed in this post was an addition caused by another $10K increase in the short term bond ladder.

    Most of the intermediate term bonds are clustered in the 2021-2023 time period which gives me most of the yield of the bonds maturing in 2025-2027 while assuming less interest rate risk.

    An example is the 2.25% Centerpoint General Mortgage bond maturing on 8/1/22 that was bought today at a 2.58% YTM. That electric utility sold a general mortgage bond with a 3% coupon last month that matures in 2027. That 2027 bond is currently trading near a 3.2% YTM:

    I am not going out to 2027 to pick up an additional .6% per annum. I really hate going out to 2022 to pick up 2.58% from a high quality bond rated A1 by Moody's and A by Fitch:

    Still, all of these bond purchases are preservation of capital buys with an income flavor, hoping for a gradual increase in interest rates that will generate more income as bonds and CDs mature.

  2. South Gent,

    In addition to the problem you described buying bonds is also subject to the broker's inventory book. Some brokers have more limited inventory books and/or higher spread relative to Fidelity, Vanguard, or IB. Opening more accounts is not practical for me as I try to consolidate accounts to make the process more manageable.

    1. Y: I run into so many broker problems and issues that having multiple brokerage accounts is the only way to deal with them. If I made a list of issues, it would probably have more than 100 entries.

      The Vanguard quote for a 1 bond Centerpoint mortgage bond was .4 higher the Fidelity quote, and Fidelity offered a better execution price than IB in that case.

      I will probably use Vanguard as a corporate bond broker sparingly due to the consistently higher prices and a commission that is $1 per bond higher than Fidelity or IB.

      There is also serious issues with Vanguards system for buying bonds, particularly U.S. treasuries. There is a frequent inability to execute an order at the price shown in the order book.

      For treasuries, I will click the buy button which automatically enters the price shown in the order book. I can not change the price. When I click submit, a message pops up in red about 80% of the time saying the price has increased (never decreased) and the revised increased price is then shown on the order page. If I click send, the order will not be filled at that higher price (about 1 in 4) and the order will not even be shown as having been entered.

  3. For the reasons you outine, I have avoided the shark infested waters of online bond buying, except for a TIPS auction purchase in December 2016 through Fidelity. In one month, 1.44% principal appreciation. Definitely beats the Fidelity MM yield at .02%

    1. Cathie: The main problem with the bond market IMO is there is no uniform market as there is in the market. There are several bond exchanges. In addition, some brokers will show bid and ask prices on orders from their own customers which will not be shown in other broker order books.

      So there is a little bit of the wild west out there. There has been improvements over the past 5 years. Still the investor needs to figure out whether their broker is quoting a price after a mark-up (after a commission) or before a commission. Some will just quote the investor a price with a mark-up for their commission. And, it is important to go mostly with the broker charging less of a commission and providing the best order book on average. At the moment, that would be Fidelity and IB among my brokers.

      When you placed a bid through Fidelity for a TIP auction, you do not have to pay a commission and you will receive the same price as everyone else. You submitted what is called a non-competitive bid, but those bids receive the same auction price determined through the competitive bid process.

      I am buying a number of TIPs in the secondary market using both Vanguard and Fidelity. All are bought in Roth IRAs since I do not want to ever pay a tax on income that is not received which is what will happen when the TIP is bought in a taxable account. The CPI accretion to the principal is taxable each year unless the bond is held in a taxable account.

      Also, when you buy at auction you will receive the $1K par value even if there is deflation throughout the term. And, buyers frequently pay too much for the TIPs bought in the secondary market and may not even recover the price paid for them with low inflation until maturity. An example is the 3 TIP bonds maturing in 2019 that I sold in 20212 at over 120 and are now priced under 107. The inflation accretion to the principal will never make up the difference to that buyer at $120+.

      I have bought some 2040+ maturities as low as 90 that were sold recently at 100. The buyers at auction have an unrealized loss now based on the auction real yield price. If I get stuck owning one, and the new 30 year TIP bond has a 2% current yield rather than say 1%, then my long term TIPs bought at a discount to par value will go down even more to account for the higher yielding new issues. I am trading those long maturities and will hold the intermediate term ones until maturity.

    2. I can not correct a comment for typos. I will simply start noting changes that are substantive. I left the word "non" out of the last sentence in the third paragraph from the bottom.

      "The CPI accretion to the principal is taxable each year unless the bond is held in a non-taxable account"

      My meaning is usually, not always, clear when I have a typo or leave out a word as my brain works a lot faster than my fingers can type.