| If you want to make good money with banks, or | | | | brokers all day. The larger institutions are more |
| any institution, Government and agency bonds are | | | | complicated, and require more price awareness. |
| where it is at. Simply because all Government | | | | They think they have the ideas covered and you |
| bonds and agencies are AAA rated, and banks | | | | may have to just be an order taker with them. |
| can buy millions of dollars of any bond without | | | | How To Sell Mortgage Backed Securities or CMO's |
| incurring any credit risk.All banks own bonds of | | | | Mortgage backed securities offer the best |
| some sort, and they are buying them from | | | | alternative to decreased loan demand. Pass |
| brokers. Our primary bonds are: | | | | throughs, CMO's and adjustable rate MBS's are |
| U.S. Treasury obligations (T-bills, T-notes, | | | | paid to the bank just like a loan that the banks |
| T-bonds) | | | | has made for a mortgage. If a person takes out |
| Government Agency Debt (GNMA) | | | | a $250,000 mortgage, the customer is paying |
| Private Agency Debt (FNMA, FHLMC, FHLB and | | | | back the bank monthly with principle and interest. |
| others) | | | | As you know, if you own a home, your initial |
| Mortgage Backed Securities (Pass throughs , | | | | payments are mostly INTEREST in the early |
| CMO's, ARM's) | | | | years. A mortgage backed security, if it is a new |
| Municipal Bonds | | | | issue will operate the same way.Length of the |
| Investment Grade Corporate Bonds | | | | outstanding mortgages, or current face of the |
| | | | mortgages are a factor. "Seasoned pools", as |
| The institutions that have strict policy guidelines | | | | they are called, are mortgage pools that have had |
| on the bonds that they can buy are Banks, Credit | | | | several years of payment on them. They have |
| Unions and Municipalities.The spreads on Treasuries | | | | more predictable payments and duration. They will |
| make them difficult to sell or "mark up" more | | | | normally pay better because of that. Seasoned |
| than a few "ticks" to most sophisticated banks | | | | pools are usually what banks are looking for. They |
| and institutions. A tick is 1 point in price. | | | | are generally interested in better cash flow and |
| Government bonds are quoted in 32nds.An | | | | predictable cash flow.The compensation or mark |
| example of a treasury bond would be: Bid 101-16 | | | | up potential is good in mortgage backed bonds. |
| Ask: 101-24. If your client wanted to buy $10,000 | | | | They are priced above treasuries because, |
| of this treasury bond, you would see the price to | | | | although they are AAA rated, they are not |
| you at 101-24 (24/32). 24/32 = .75. So the price | | | | absolute in their pay off and the payments |
| is really 101.75 or $10,175. Each point represents | | | | fluctuate. Since they are usually 15-30 years in |
| $10 for every $1000 par bond. For $10,000, each | | | | duration, they allow for price mark up. Where |
| point is worth $100. All bonds trade at a minimum | | | | treasuries and straight agency debt allow for a |
| of 1000. Institutions normally buy $250,000 up to | | | | few ticks to a .25, MBS's can create spreads |
| tens of millions per trade. So, our example of a | | | | between buying and selling them up to a ½ |
| $10,000 trade really isn't realistic and would not be | | | | or ¾ of point. This can translate to a $5,000 |
| worth your time. A "tick" by the way, is if the | | | | commission on a $1 million sale. Remember, a |
| price went up to 101-25.Trading for a few "ticks" | | | | million dollars in one bond is not unusual for most |
| on $100,000 would make you very little. If you | | | | institutions, and for banks over $500 million in |
| factor in ticket charges, you might make $100 on | | | | assets, it's normal.Other Types Of Institutions To |
| the trade. You only present treasuries if it's non | | | | Sell Bonds to:There are other institutions that buy |
| competitive, or if the client is investing at least | | | | bonds of course. However, other institutions for |
| $1,000,000, otherwise it won't make you much. If | | | | the most part can buy other competitive |
| your client deals with 3 other brokers on | | | | investments, and deal with other brokers in those |
| treasuries, you will all be fighting for very little | | | | areas. Also, many of these others hand over |
| money. It's very easy to get a quick quote on | | | | portions of their major assets to professional |
| treasuries. Every major dealer owns them, and | | | | money managers. Banks, CU's and municipalities |
| they can be purchased quickly. You or your | | | | only buy fixed income, so their entire portfolio is |
| trader will contact a major brokerage firm (Merrill | | | | available to you. They also will very rarely turn |
| Lynch, UBS etc.) and buy them. Not much money | | | | their entire portfolio over to a 3rd party. That is |
| yes, still, it is assets you are controlling, and it | | | | not the case with some of these others. They |
| could be used as available money to swap out of | | | | would include:Insurance Companies |
| into a better investment for the client.Treasuries | | | | Foundations |
| are very safe of course, that's why they are | | | | Universities |
| bought. Only buying treasuries will diminish the rate | | | | Hospitals |
| of return of the entire portfolio, if that is their | | | | Pension Funds |
| only or main investment vehicle. Treasuries offer | | | | Cemeteries (Yes, even them)Ultimately, these |
| flexibility though. The market values on them will | | | | accounts can buy almost any type of bond. |
| normally hold up well over time. They are very | | | | Corporate bonds can be offered as well. Still, your |
| liquid and can be traded instantly. You should sell | | | | opportunities are spotty in with these accounts. |
| them only as "time bucket" or maturity gap | | | | Information or lists of these types of accounts |
| placing.If you see the bank has nothing maturing in | | | | can be obtained through directories or other |
| the first half of a year for instance, you can | | | | sources.Focus on the Financial and public |
| recommend treasuries there too. Remember, | | | | institutions. They will be a much higher percentage |
| institutions are looking for best price, but also | | | | play for you to sell bonds.Good Luck!Nick Hunter is |
| good advice. The medium sized banks ($50 million | | | | the President of American Investment Training |
| - $500 million assets) will value good planning and | | | | and he writes for - a finance education and career |
| thoughtful recommendations over dealing with 10 | | | | job site for brokers. |