TSC's Guide to Bonds Online

The bond market, like the stock market, is being revolutionized by technology.

Electronic trading systems are proliferating as dealers race to capture on volume what they are bound to lose on individual transactions. As a result, the days of bond trading over the phone are widely believed to be numbered. A recent survey by the Bond Market Association, which represents the firms that underwrite and trade bonds, found that electronic trading systems are expected to be the single largest revolutionizing force in the market over the next three years.

Unlike the stock market, however, the bond market remains a professional-dominated market. According to the latest Federal Reserve data, individuals directly hold about 40% of the market value or corporate equities but only about 7% of all credit market debt outstanding. Fittingly, the bulk of the technology that has been devised for the bond market has been devised for, and is available only to, institutional investors.

The reasons for this state of affairs may never change: The bond market is a professional-dominated market because it's a relatively illiquid market, and it's a relatively illiquid market because of what a bond is: an income stream. Sure, traders buy and sell bonds to profit from changes in interest rates and credit quality. But the bulk of the market is in the hands of investors, who buy bonds to stick them in a portfolio and let them throw off income until they mature. Bonds trade over the counter rather than on trading floors because there's not enough trading in bonds to pay for the floor. In short, most stocks trade every day; most bonds don't.

The same facts also explain the relative scarcity of free information about the bond markets. With most bonds trading infrequently, the price at which the last trade on a bond took place isn't necessarily useful or valuable information. The trade may have taken place three weeks, if not six months, ago.

At the same time, the lack of price transparency in the bond market (especially in the corporate and municipal markets; the Treasury market has become quite transparent, even to individuals) historically has been and continues to be a source of enormous profit for bond dealers: If it's hard to find out where the market is, then investors can be enticed to pay too much.

What do individuals need in order to evaluate bond prices? Not much. If they can't find out how much another investor paid for a similar lot size of the same bond very recently, maybe they can find out how much other investors paid for similar lot sizes of similar bonds very recently. At a minimum, they need an indication of where the market is.

For example, investors in the market for a single-A-rated New York muni bond due in 15 years need a yield indication for bonds in that category. And if the indication is for a $1 million lot, they need to know how much more they should expect to pay to buy $25,000. Those indications exist, to be sure. Mutual fund companies use them every day to calculate the share prices of their bond funds. But is that information posted anywhere on the World Wide Web? Nope.

Slowly but surely, however, free information about the bond markets and the ability to do bond transactions are becoming available online. This three-part series measures the progress so far. Thursday we'll point you toward the most useful sources of bond information on the Web. Friday we'll look at how far the biggest online brokers have come (or not) in giving customers the ability do bond transactions with a mouse. We'll conclude with a look at how various Web sites are displaying a bond database that you can use to get price indications on bonds you are interested in buying.

>To order reprints of this article, click here: Reprints