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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Joan Osland Graffius who wrote (14211)	3/31/2002 7:23:09 PM
From: Edmond Katonica	Read Replies (1) \| Respond to of 78711

Joan You May Find this of some interest story.news.yahoo.com Buying Bonds as Interest Rates Rise Sun Mar 31, 9:48 AM ET By Jonathan Stempel NEW YORK (Reuters) - Economists expect interest rates to go up as the U.S. economy recovers. So that must make this a bad time to buy bonds, whose value falls as rates rise. Nonsense, says Tom Ricketts, president of Incapital LLC, a Chicago-based company that, through its "InterNotes" program, tries to help ordinary retail investors buy individual bonds with no-commission minimum purchases of $1,000. "We don't know that it's going to be a rising interest rate environment," he said in an interview. "It's ill-advised to try to time the equity market. It is even more ill-advised to think that with the 'safe' part of your portfolio, you're going to time the bond market too." Incapital began offering InterNotes early in 2001, and says it has sold more than $7 billion offered by four brand-name, "investment-grade" companies: banking giant Bank of America Corp. , automaker DaimlerChrysler AG , consumer finance company Household International Inc. and, starting in March, aerospace giant Boeing Co. . "A year ago, the question was, 'Is there demand for corporate bonds in retail?"' said Ricketts, whose father, J. Joe Ricketts, founded discount broker Ameritrade Holding Corp. . "A year forward, there's no question." The program, also arranged by Banc of America Securities LLC, is one of at least two bond programs focused on ordinary investors. Another is the "Direct Access Notes" program offered by the LaSalle Broker Dealer Services division of ABN Amro Financial Services Inc. Both are designed for investors who wish to buy individual bonds rather than invest in bond mutual funds, and who, unlike institutional investors, cannot buy bonds in bulk. BITING THE BULLETS Typical InterNotes investors are between age 55 and 64, invest less than $20,000 per issue, and want to capture perhaps 25 to 40 percent more yield than they can find on safe U.S. Treasuries. InterNotes carry a variety of coupons (usually 4 to 8 percent), maturities (usually two to 25 years), and interest payment schedules (monthly, quarterly or semi-annually). A majority of the bonds carry "call" options letting the issuer buy the bonds back in two to five years, in exchange for a higher yield. The remainder, nearly 40 percent, are "bullet" bonds that require an issuer to make interest payments until the bonds mature. "There are always investors who like the callable products and go for the highest yield they can find," he said. "We're finding more people are looking at relative value, and we're selling a lot more noncallable bonds. A few years ago, everyone said you couldn't sell bullets to retail -- all they do is buy yield. We've proven that wrong." RISK, AND ENRON To be sure, corporate bonds still have risk. Ask any investor in Enron Corp.'s bonds, which went from "investment-grade" to default in four days. "I don't think there's any investor who thinks corporate bonds have no risk, particularly in light of recent developments," said Ricketts. "On the other hand, I think they recognize that events like Enron are relatively anomalous." Ricketts said Incapital plans to add at least two new InterNotes issuers in the next few months. He said four or five individual bonds should give investors enough diversification. "You don't need to have 15," he said. "You do that in equities to track an index, or eliminate all the idiosyncratic risk. In bonds it isn't that complicated. You should pick a few across different industries with different credit profiles."