I’ll be the first to admit that I’m not an adept bond investor. I’ve limited my purchases to treasuries and one municipal bond. Generally speaking I think for most individuals, they are better off investing in a bond fund rather individually crafting a portfolio of bonds. This is true for a number of reasons:

  • Bonds trade in larger denominations (Thousands), making it harder to diversify a smaller amount of money
  • Researching Bonds can be more difficult
  • Trading costs associated with bonds are both higher and less transparent (Brokerages in the past have embedded the cost of the trade in the price of the bond making it less clear what you were actually paying just to buy or sell a bond)

Charles Schwab is making a little easier for its clients at least on the last point. According to a Wall Street Journal Article yesterday, Schwab will only be charging $1 per Bond. They already don’t charge for treasury securities brought at auction making them competitive with the Government’s own service, TreasuryDirect. The lower bond fees follows a tactic that Fidelity embarked upon in 2004 of charging between .50 cents and 2.50 per bond.   Fidelity and Schwab are slugging it out for the same set of customers - customers who want a few more bell and whistle than the Zeccos (who offers free trades) of the world can offer. Of course there is still a minimum transaction cost $10 making it wasteful to trade anything less than 10 bonds. In the past I never considered bringing my business to Charles Schwab. As far as online discount brokerages, they were lapped in terms of cost by the other brokerages. However in the recent years, Schwab has aggressively cut prices making them competitive. This is especially true if you have invest-able assets over $1 million with them.

Lower trading costs are always a good thing. The question still remains does individual bond investing makes sense for most people? While I still think not, for some they might. On reason to invest in Bonds is they are often  are a superior investment in comparison to other time deposits such as CDs. If you’re investing in CDs, there’s no reason not to invest in at least U.S. Government treasuries. Municipal bonds also offer a very attractive alternative to CDs for tax reasons especially if you can’t find an appropriate municipal bond fund for your particular state. The nice thing about investments such as CDs and Bonds is that they allow you match a maturity with known liquidity needs. For instance if I know I will have to pay off a loan in exactly two years, it makes a ton of sense to buy a bond that matures in two years. In this way I can lock in the potentially higher rate of a two year maturity, and not worry about how interest rates might move between now and then.

Alternatively bond investments offer another opportunity to speculate. As the last week and this week has shown, interest rates can move quite a bit, taking bond prices with them. As interest rates move up, bond prices move down, and vice versa. A speculative investor can take advantage (or be taken advantage) by these movements to buy and sell bonds for capital gains instead of just the interest payments.