BONDS
The staid world of bonds, struggling with low inflation and rocked by the Treasury Department's recall on 30-year notes in mid-January, is about get ripped open at its gray flannel seams as online brokerages attempt to mainstream the $14 trillion US bond market.
Most etrading houses sell bonds, but usually you have to drill down to find them. One reason they're not out in front with the stock pitches is the higher commissions involved: $35 to $50 per purchase, plus as much as $5 per bond. Why such high fees? Because the ebroker's usually not making the trade online at all. Most are executed via a phone call to a specialized bond broker.
But direct online trading has finally reached the bond market. Trading Edge's BondLink service recently began selling high-risk, high-yield securities and emerging market debt purely online. More to the point, the firm is considering offering the investment-grade bonds (rated BBB or better for risk) preferred by small investors. Big houses like Morgan Stanley Dean Witter, Merrill Lynch, and Fidelity are experimenting with electronic bond deals as well.
In the coming year, according to Trading Edge CEO Murray Finebaum, fees for online bond transactions will drop, and the market, now dominated by professionals, "will migrate to retail investors." Finebaum hopes the rise of electronic bond trading will illuminate the murky word-of-mouth system that currently prevails. As it is, the spread between sellers' and buyers' prices makes it difficult for consumers to figure out how much of their cost goes to the broker.
Ebrokerages tend to be more straightforward, according to Alex Stein of Gomez Advisors, a consultancy based in Lincoln, Massachusetts. "Consumers have always gotten the dregs," Stein says. "But because of the economies of scale on the Internet, online brokers will lead the innovation."
For now, you can use BondLink to cut down the conjecture - and time commitment - traditionally involved in pricing bonds. You might look for a high-yield junk bond that converts to stock at just the moment the market recovers from a tailspin. Or, come May, you might choose a cozy municipal bond from the local utility - just the thing to help you sleep easily on your dot-com gains.
- Dick Satran (dick.satran@reuters.com)
Trading Edge:www.tradingedge.com.
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