Mole’s Up, Mole’s Gone

When it comes to bond quotations, it’s like playing whack-a-mole. You know the game: the mole pops its head out of the hole, you try to smack it with a hammer, but it’s gone before you even swing.

The other day, my colleague picked out a hotel room for a business trip on an online booking platform. The price for one night was €153. But, as we all know, such prices are always just an indication. It’s the same with quoted bond prices on Bloomberg. There, you might see something like 149–153 (in this case, percent). Two sides, because unlike hotel rooms, you can also sell bonds. A volume is usually mentioned as well. For the hotel, it’s one room. For bonds, it might be €1 million per side.

But when it comes to actually trading on the quote, those prices don’t necessarily hold up. Case in point: when the hotel room was booked, the response was: “Sorry, that offer is no longer available. The next higher category costs €159.” Honestly, it’s still fine – after all, you’re getting more for a slightly higher price. But the algorithm had us beat, sneakily squeezing out a few extra percent without us noticing.

Get a premium, avoid the costs

Private investors should be aware of the actual transaction costs when buying or selling a bond. That’s because the final prices often differ from what’s displayed on-screen. Even if you use limit orders, you only get the deal after the market makers have taken their cut. Professional investors can’t escape these additional costs either – they’re called “spreads.” That’s the difference between the bid and ask prices.

This is why the Gutmann bond team has been deeply involved in the primary market for many years – that is, in the issuance of new bonds. Every year, we subscribe to hundreds of new bonds for our bond funds.

Why is this particularly beneficial for our clients? The spread is avoided when subscribing, and there are no transaction fees. Plus, we claim the new issue premium from the bond issuer. What’s that, you ask? Since companies are eager to place their debt, they often offer particularly attractive yields above the secondary market.

By investing in a bond fund, you bring a broad spectrum of securities into your portfolio while paying the valuation prices of the individual bonds. The daily calculated net asset value is what counts – unlike the fleeting mole popping its head up.