You Don’t Always Know What Bonds Cost – BloombergA classic way to trade bonds is that you call up a broker-dealer (generally a trader at a big bank) and say “I want to buy Bond X and I’ll pay up to 90 cents on the dollar for it,” and then the dealer thinks about who else she knows who owns Bond X and might want to sell it, and she thinks “ah yes Customer Y was telling me the other day that she wants to get rid of Bond X,” so she calls Customer Y and says “hey do you want to sell Bond X,” and the Customer Y says “sure but I won’t sell for less than 91 cents on the dollar,” and then the dealer tries to negotiate you up and/or negotiate Customer Y down so that a trade can happen. If she gets you up to 90.5, and gets Customer Y down to 90.25, then a trade will happen: The dealer will buy from Customer Y at 90.25 and sell to you at 90.5, collecting 0.25 as payment for her work.This is not the only way for bond trades to happen — a lot of trading is electronic, and sometimes the dealer will own Bond X herself, and just sell to you out of inventory — but it is a common one. It is often called a “riskless principal” trade: The dealer buys from Customer Y for her own account, and then sells to you at a markup, but she does both trades at the same time without taking any market risk by holding the bonds.Before it’s here, it’s on the Bloomberg TerminalBloomberg Terminal LEARN MORE
