How to Research and Buy Bonds

Simple Tips for Bond Investors

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You don't have to be an expert to do your own bond research and buy the best bonds. All of the knowledge, terminology, and complexity involved with bond markets can be accessed and made simple with a handful of simple strategies and a few useful websites. There are bond analysts and credit agencies that do most of the work for you. Therefore the bond investor only needs to know where to look and how to interpret the information that already exists.

Pick Bonds Like the Pros

If you want to pick bonds like the pros, see what they have picked! Humility is a powerful virtue in the bond investing world. Don't try to jump into your bond investing with only your own judgment as a tool. Start your bond research by taking a look at some portfolio holdings of some of the best bond mutual fund managers in the world. They have experience, good judgment and teams of analysts to help them pick bonds for their portfolios.

You'll find holdings information on one of the best mutual fund research sites. For example, on Morningstar's website, you can type in the ticker symbol of a bond mutual fund, go to that fund's main information page, find the link to "Portfolio," then follow the link to "Holdings" and there you'll find a list of the fund's top 25 bond holdings.

Bill Gross is probably the best-known bond fund manager in the world. He manages the largest bond fund portfolio, PIMCO Total Return (PTTDX), and a few others, such as Harbor Bond (HRBDX).

Dan Fuss, best known for managing Loomis Sayles Bond (LSBRX), has nearly 50 years experience investing in bonds. Also, he's not a specialist, which means his knowledge is both deep and wide; he invests in almost every type of bond. Fuss can even dig into the junk bond (high yield) area of the bond world. So Dan Fuss' bond picks can give you some ideas many other managers won't provide.

Avoid the Most Common Mistakes of Buying Bonds

  • Reaching for too much yield: Advanced and beginning investors can both make the mistake of researching and buying only high yield bonds (aka junk bonds). Higher rates of interest are good but these high yields come with a hidden cost: this cost is default risk. Generally, the higher the yield, the higher the risk of default on the issuing company. This is similar to an individual paying higher interest rates on borrowing; higher rates are applied to higher risk borrowers. If all of your bonds are high yield, you may earn more interest but you may also lose principal if the issuing entity (the borrower) declares bankruptcy and is unable to pay you back your initial investment.
  • Overlap with similar maturities, bond type or industry type: This common mistake is similar to overlap with mutual funds. If you have several different bonds in your bond portfolio, you may not be properly diversified. Try to have differing maturities (i.e. 1-year, 5-year, 10-year, 30-year), differing bond types (i.e. Treasury, Municipal, Corporate, High Yield) and differing industries among corporate bonds (i.e. financial, health, manufacturing, retail).
  • Failing to find best prices: Bonds have "markup prices," which means there are broker commissions built into the price. However, it is not mandatory that you pay the full markup; bond prices are somewhat negotiable. The broker may be offering it at 101 ($1,010 for one bond), but you see on another site that it is trading at 99½ ($995). You should try to pay no more than the most recently traded price.

How to Research Bonds to Buy

To avoid these common mistakes, do some of your own research on free sites, such as Yahoo Finance for Bonds and On these sites, you can learn more about bonds and check prices before you make a purchase. You can also check out a few articles on other sites, like this Kiplinger article on how to research and buy bonds. Also, learn about motif investing