Buying a Primary or Secondary Bond Issue

By Russell Wild

All bonds are traded through brokers. But some bonds available for sale are new or primary issues. Others are secondary issues. Yes, it’s something like buying a new versus a used car — except the used bond isn’t necessarily any cheaper.

In fact, according to Bill Conger (a principal and senior portfolio manager with Red Hook Management in Morristown, New Jersey), bonds that are just issued, especially in the municipal-bond arena, quite often offer juicier deals. You still need to be careful and follow all the rules, but all things being equal, the odds of a broker nailing you with a ridiculously excessive markup are less in the primary market. That’s because new issues are almost universally issued at the same price for all buyers, says Conger. “If the broker tried to mark up the price of the bond too much, it’s doubtful that the bond issue would sell.”

Bottom line: Ask your favorite broker — and your favorite broker’s competitors — for a listing of all new issues. Then compare and contrast the yields on the newbies versus the oldies. You may be impressed. The mechanics of buying a primary issue differ from one brokerage to the next, but generally, you can place an order at a specific price and yield. If the price goes up and the yield goes down between the time you place the order and the bond goes to market, you have the opportunity to back out of the deal. If you trade stocks, you’ll recognize this situation as similar to a limit order on a stock.