Future of individual bonds

or Register to post new content in the forum

93 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Jul 17, 2009 10:48 am

Edward Jones is very heavy into the individual bond business, and with the impending demise of Citi, I'm curious as to whether they'll change direction.


Like many people at Jones, I went through the hell that was calling Lehman bondholders and telling them their money was gone. Now I'm looking at a list of C bondholders this morning and getting ready to deliver the bad news to them.
 
Several guys I talk to regularly at other firms stopped selling individual bonds years ago. Did they know something Jones didn't?
 
This really, really sucks. 
Jul 17, 2009 10:54 am

No.  My buddies at Merrill in town specialize in bonds.  Mostly muni's, but they primarly buy individuals, not funds.   You use an SMA and all they are doing is buying individual bonds for a fee.  Buy a UIT, and all they are doing is buying individual bonds for a fee.

 
So I ask, if you do not buy individual bonds, then what do you buy?  I can tell you, for higher net worth individuals, bond funds don't always work.  It might SOUND old school, but plenty of wirehouses and independant advisors still use individual bonds.  Try talking to a  70 year old with $5 million in muni's about a bond fund.  Ain't gonna happen.  Expenses and turnover just eat away too much at the return in a bond fund (especially muni funds).  Most "muni buyers" buy good muni's and hold them to maturity (or death).
Jul 17, 2009 10:57 am

UIT

Jul 17, 2009 10:57 am

Citi or CIT - - - Big difference when you're notifying your client's of a "demise".

Jul 17, 2009 10:58 am

I went through the same with Lehman Bonds and because of it pulled people out of CIT bonds on Friday and Monday.  70% of the money was saved.  I sweated the whole weekend thinking they were going bk like Lehman.  But Tuesday, I started fretting CIT was going to get bailed out and that I had pulled the trigger to soon.  So, like you, I think bonds in my book is a thing of the past.  Not worth the losses and stress.

Jul 17, 2009 11:09 am
Christo:

Citi or CIT - - - Big difference when you're notifying your client's of a "demise".

 
Scared the sh*t out of me for a moment until I realized he was actually talking about CIT.
 
Individual bonds are not a big part of my practice, although I did recently take advantage of high yields in short Citi (not CIT) and Merrill Lynch paper.  I was finding better than 6% in less than two year maturities and felt like both of those entites were at least that safe.  That being said, for the most part, unless it's an insured CD or A underlying muni, I let fund managers pick my bonds for me.  Perhaps that means I have exposure to CIT, but at least it's part of a well-diversified bond portfolio.
Jul 17, 2009 11:11 am
 
Jul 17, 2009 11:13 am
B24:

No.  My buddies at Merrill in town specialize in bonds.  Mostly muni's, but they primarly buy individuals, not funds.   You use an SMA and all they are doing is buying individual bonds for a fee.  Buy a UIT, and all they are doing is buying individual bonds for a fee.

 
So I ask, if you do not buy individual bonds, then what do you buy?  I can tell you, for higher net worth individuals, bond funds don't always work.  It might SOUND old school, but plenty of wirehouses and independant advisors still use individual bonds.  Try talking to a  70 year old with $5 million in muni's about a bond fund.  Ain't gonna happen.  Expenses and turnover just eat away too much at the return in a bond fund (especially muni funds).  Most "muni buyers" buy good muni's and hold them to maturity (or death).
 

Sorry, I'm a tad frazzled this morning. I meant CIT.
 
I'm pretty clear on the concept that fixed income UITs and SMAs are comprised of individual bonds, but last I checked, there are no UITs or SMAs that own just ONE bond.  
 
My point is, it makes far more sense to me to use those methods for owing fixed income rather than just rolling the dice on a few companies. 
 

I'm planning on today being the last time I call my conservative investors to inform them they'll not be getting back a substantial portion of their conservative investment.
 
By the way, do you sell bonds WITHOUT a fee?
Jul 17, 2009 11:18 am
Indyone:
Christo:

Citi or CIT - - - Big difference when you're notifying your client's of a "demise".

 
Scared the sh*t out of me for a moment until I realized he was actually talking about CIT.
 
Individual bonds are not a big part of my practice, although I did recently take advantage of high yields in short Citi (not CIT) and Merrill Lynch paper.  I was finding better than 6% in less than two year maturities and felt like both of those entites were at least that safe.  That being said, for the most part, unless it's an insured CD or A underlying muni, I let fund managers pick my bonds for me.  Perhaps that means I have exposure to CIT, but at least it's part of a well-diversified bond portfolio.
 
I agree completely with you and Spears.
 
Unfortunately, B24 now devotes most of his energy to defending Jones and their philosophy instead of thinking through an issue and giving us his thoughts.
 
He's a sharp guy, but I'm afraid he's too intoxicated on the kool-aid to ever be relevant again.
 
 
Jul 17, 2009 1:17 pm

Huh?  First off, I never said someone should own "just one bond".  I don't have any clients that own "just one bond".  If I can't buy at least 8- 10 different bonds for a client, I use a fund (although I've also started looking at the UIT's lately).  And WTF did you get the idea that I was defending Jones?  Did you not read my post?  It has nothing to do with Jones.  Sorry to tell you, the entier industry will continue to buy individual bonds.

And yes, clients pay a fee to buy bonds.  Once.  When you buy a fund, they pay a fee (or commission) once, then twice, three times, four times, five times.......every month those fund expenses eat away at the meager return of the bond (on top of the commission or mgmt fee).
Do me a favor, call up a bond buyer and ask him what he thinks of a bond fund.  Yes, a "bond buyer".  They still exist.  They want "individual" bonds.
 
Borker, you need to get your head examined.
Jul 17, 2009 1:27 pm

I think the problem a lot of Jones guys have, myself included, is that we just don't own enough individual holdings in bonds.  Fortunately I've only got 4 clients who owned (sold them all this week) CIT group bonds.  Unfortunately some of them also own some others that have been pretty scary recently too.  I'm leaning towards cutting individual bond holdings out of my business altogether.  I'm a little more comfortable with munis because they have the taxing power of the issuer, generally speaking, to rely on, not just the stability of the finances of the corporation.  I have a  lot of money in bonds that came straight from inv,str a few years ago.  All of those scare me right now.  I don't care to call one more client and deliver the news that their bond is selling at $.40 on the $1.  I had enough of that with LEH, GMAC, CIT, some PRU, and a couple of others.    

Jul 17, 2009 1:33 pm

Individual bond issues will never go away. Seriously, you have probably had more stocks on your firms recommended list go into bankruptcy than you have individual bond issues blow up on you. B24 is correct, in that HNW individuals will choose individual issues over funds 9 times out of 10.

Jul 17, 2009 1:50 pm
Spaceman Spiff:

I think the problem a lot of Jones guys have, myself included, is that we just don't own enough individual holdings in bonds.  Fortunately I've only got 4 clients who owned (sold them all this week) CIT group bonds.  Unfortunately some of them also own some others that have been pretty scary recently too.  I'm leaning towards cutting individual bond holdings out of my business altogether.  I'm a little more comfortable with munis because they have the taxing power of the issuer, generally speaking, to rely on, not just the stability of the finances of the corporation.  I have a  lot of money in bonds that came straight from inv,str a few years ago.  All of those scare me right now.  I don't care to call one more client and deliver the news that their bond is selling at $.40 on the $1.  I had enough of that with LEH, GMAC, CIT, some PRU, and a couple of others.    

 
"The problem, dear Brutus, is not in the stars but with ourselves."
 
At issue here is the Edward Jones model that encourages you to hold the bonds until they've reached 40 cents. Would any rational investor wait until the value of the stock fell that far? Of course not; that's why you have stop limits.
 
But we've got these stupid little cows on our desks, and field supervision telling us we "buy and hold" bonds. A$$holes. Worse yet, heaven forbid a bond goes up and you harvest the gain.
 
Buying individual bonds is best for the client, because it costs them less. What isn't good for the client is the slavish adherence to a policy that doesn't always fit.
Jul 17, 2009 1:57 pm
Spaceman Spiff:

I think the problem a lot of Jones guys have, myself included, is that we just don't own enough individual holdings in bonds. Fortunately I've only got 4 clients who owned (sold them all this week) CIT group bonds. Unfortunately some of them also own some others that have been pretty scary recently too. I'm leaning towards cutting individual bond holdings out of my business altogether. I'm a little more comfortable with munis because they have the taxing power of the issuer, generally speaking, to rely on, not just the stability of the finances of the corporation. I have a lot of money in bonds that came straight from inv,str a few years ago. All of those scare me right now. I don't care to call one more client and deliver the news that their bond is selling at $.40 on the $1. I had enough of that with LEH, GMAC, CIT, some PRU, and a couple of others.





Does anyone else notice the problem that I see.. LEH GMAC CIT... all financials. Why don't you try diversifying out of financials. I think individual bonds are great especially for older clients. You can stagger the payments and they are getting a check a month. But you have to diversify(to you EDJ guys credit, not a whole lot of choices in inventory of non-financials if i remember correctly). My clients who own utility bonds, Pepsi, McDonalds, Walmart, John Deere, seem to be doing ok.



Bond funds are a rip off..

Jul 17, 2009 2:19 pm

Except for some of my largest clients, I'll gladly recommend that people pay 50 bps to get well diversified and have a pro decide when to cut an issue loose.

Jul 17, 2009 3:05 pm

I few aer talking about corporate bonds, I tend to agree that bond funds work well due to the yields and diversification.  I don't buy a lot of corporate issues except for clients that are strictly bond buyers.  I was referring more to muni's.

But even on the corp side, I never bought a lot of financials.  I basically diversified my bond holdings just like equities.  Not one of my clients holds more than one bond in any on industry.  I was fortunate (mostly through luck) that I never owned any CIT, Lehman, GMAC, etc.  None of my bonds have even come close to BK.  Although I will admit to being a little heavily weighted towards utility bonds.  But I also own Home Depot, WalMart, Alcoa, AT&T, Kraft, Cisco, HP, John Deere,.....all good stuff.
 
But those advisors at Jones that buy a lot of financials at Jones, simply because they are there, well that's stupid.  Use your head.  And use some common sense on the sell side.  Think for yourself.  I've harvested plenty of gains, and sold some losers, with rarely a note from Compliance.  The only exception was some exceptional gains I made on muni's over the past year, that my client wanted to sell.  I actually encouraged him to keep them, as we had picked up AAA's yielding over 6% (due to the huge discount), and tried to get him to see that this was probably the best opportunity in his (investing) lifetime for muni yields.  But he saw the big gains and wanted to cash in.  We made close to 25% on some of them.
Jul 17, 2009 8:50 pm
B24:

I few aer talking about corporate bonds, I tend to agree that bond funds work well due to the yields and diversification. 

 
I was fortunate (mostly through luck) that I never owned any CIT, Lehman, GMAC, etc.  None of my bonds have even come close to BK.  Although I will admit to being a little heavily weighted towards utility bonds.  But I also own Home Depot, WalMart, Alcoa, AT&T, Kraft, Cisco, HP, John Deere,.....all good stuff.
 
  The only exception was some exceptional gains I made on muni's over the past year, that my client wanted to sell.  I actually encouraged him to keep them, as we had picked up AAA's yielding over 6% (due to the huge discount), and tried to get him to see that this was probably the best opportunity in his (investing) lifetime for muni yields.  But he saw the big gains and wanted to cash in.  We made close to 25% on some of them.

Amen on that--we made some exceptional purchases in Dec. and Jan. Most of the issues you just named were trading at huge discounts and are now in double digit premiums.
Clients have gains in the bonds that look like equities. They are quite pleased with those vs. the folks that had equity-like losses in Bond Fund of America..
 
I would like to understand how you guys use the UIT issues, though. I havent ever done any, and have just started looking as a shrt term alternative to longer term cd's.
Are the yields similar to individuals? Do you see much principle appreciation in the UIT's at maturity?  Also--who/what UITs are  you using?
 
I recently partnered up w/a guy that has HUGE amounts of CMO and other mortgage-backed debt in his accts. Some are off 50-60%. I'm thinking of possibly using the UITs to help repair some of these losses. What have you guys been using to replace some of these dog issues?
 
thx
Jul 17, 2009 8:58 pm

We have not had a bear market in bonds in a long time. I would not want to be holding a fixed income portfolio of bonds when we have one again. And there are a lot of reasons to think its coming. Not this year, MAYbe not next, but there sure aint a lot of upside in bond funds at current interest rates
I use bond funds for the tactical piece. But for straight corporates or munis, if i have enough money to divesify, i'll buy individual credits all day long.

Jul 17, 2009 11:02 pm

I agree with B24 that High Net Worth Investors generally prefer

individual bonds over Bond Funds. The largest account in my book is

a client who owns 2.1 million in individual muni bonds. He will not

touch a bond fund or a UIT for that matter. I have tried to talk to

him about MAP for muni's, but he would not do it because of the cost.

I will say that for myself, everysince Lehman Brothers, I have been

talking more about UIT's than I ever did in the past just because of

the increased diversification and safety that they provide income

investors.

Jul 18, 2009 8:50 am

Who said anything about HNW? I'm talking about bonds in a typical Jones client's portfolio.