Best time to Buy Bonds

Bcommercial

I'm looking to buy some German 1 day bonds soon, but after researching I still haven't quite grasped the concept of when is the best time to buy such bonds. There are daily price & % figures available for these 1-day bonds, and although I'm more interested in flexibility & security rather than % returns, I'd still want to purchase at the best time (if there is one), to maximize yields which are going to be meagre at best anyway. Thanks

pocketdooz

Bcommercial wrote: »

I'm looking to buy some German 1 day bonds soon, but after researching I still haven't quite grasped the concept of when is the best time to buy such bonds. There are daily price & % figures available for these 1-day bonds, and although I'm more interested in flexibility & security rather than % returns, I'd still want to purchase at the best time (if there is one), to maximize yields which are going to be meagre at best anyway. Thanks

A 1-day bond ??

dunkamania

short dated zeros? or buying bonds one day before expiry, either way it doesnt make sense.

Bcommercial

Thanks for replies. Perhaps I'm describing them wrongly or have misunderstood the whole thing, but the german bond issuing agency does have an offer called "tagesanleihen" or "Government Day Bonds", which are quoted each day at different prices and interest rates. Today's rates (Oct 26th) are buying @ 100,209645 at interest rate 0.71%.

An english link to this can be found on the German Finance Agency's website
http://www.deutsche-finanzagentur.de/en/private-investors/

and from there (in german) to
http://www.bundeswertpapiere.de/de/tagesanleihe/funktionsweise/

and
http://www.deutsche-finanzagentur.de/fileadmin/Material_Deutsche_Finanzagentur/PDF/Aktuelle_Informationen/Current_Conditions.pdf

I'm currently battling with the whole idea of how bonds work, yield/price etc, but since your money in these day bonds is redeemable daily I thought they might be worth looking into. Any info much appreciated.

dunkamania

This appears to be a retail focused, state backed savings account programme, as far as i can tell.

"German Government Day-Bond (Tagesanleihe): In July 2008 the Federal Government extended the range of products for retail consumers. The so-called German Government Day-Bond was introduced to the market. The bond combines the advantages of a Federal Security and an instant access savings account. It bears an unlimited maturity and can be ordered exclusively from the German Finance Agency."


I am confused by your pricing, as the website you linked has a gross yield of 0.62% for a bond with a 6 week maturity. I would expect the Day bond to yield less than this. Can you link to the page with the prices of the Day bond?

Bcommercial

The day bond's interest rate is linked directly to the Eonia rate less 0.15%. So today's Eonia 0.859 less 0.15 = 0.709 or approx 0.71% as listed on todays website. The Eonia almost doubled overnight from Oct 11th to 12th from 0.39% to 0.762%, which might account for the relatively higher interest rate for the "day bond" as against the bond with a 6 week maturity you mentioned (btw although I found some references to bonds @ 0.62% on the link I posted, I couldn't understand how you got the "6 week maturity" bit you mentioned, which just goes to show what a novice I still am I suppose...so please bear with me).

Here's a link to all the historical daily prices and interest rates to date since they first started on 01.07.2008 (only updated weekly)

http://www.bundeswertpapiere.de/fileadmin/Material_Bundeswertpapiere.de/Seite_Tagesanleihe/tagespreis_tageszins.xls

The price starts at par on 1st Jan each year and the prevailing daily interest rate is added each day to the price of the bond, so they become dearer/more valuable to either buy/sell according as the year progresses. So the Oct 27th price of 100.211621 I presume represents the initial par price of the bond plus all accrued interest to date. As you can see, the yield is very low but the Eonia rate and hence the daily interest rate attributable to the bond were at a very low rate throughout the year and only just jumped (doubled) a few weeks ago.

Anyway getting back to my original query, would this be as good a time as any to buy such day bonds, since they are relatively cheap due to the low interest rates to date (@ 100.21), but should be getting relatively more worthwhile going forward with the higher Eonia rates.

Thanks again, from "Bond Newbie" :-)

strmin

Unless you are going to invest millions I seriously doubt interest would cover your transaction costs.

Bcommercial

No strmin, certainly not millions! :-(. But what transaction costs are you talking of, as there are supposed to be none when buying bonds directly through the german agency or "Finanzagentur"? While not expecting to "make" much on these day bonds I wouldn't be wanting to lose anything either ...am I missing out something here? The way I've come to understand these day bonds over the last few weeks (quite agonizingly sometimes, as a newbie), I can buy say 100 euros worth of bonds bought at par on 01.01.2010, for 100.211621 today. This extra premium of 0.211621 represents the accumulated interest earned throughout the year to date, which then I get to redeem at year end. If I had to sell this 100.211621 worth of bonds tomorrow, then I can do so at the price paid plus the premium of todays daily interest rate on top (.71%),which although minimal would rule out any possibility of the initial investment decreasing. Am I understanding these things correctly anyone?

strmin

We are talking about really silly yield here, so even trip to bank, transfer cost or posting receiving bond certificate can wipe out or reduce your gain.
I can't read German, but most bonds have par value 1000. That means if you see price 101.5, you pay 1015 for one bond. I doubt you can buy 100 euros worth of bonds.

Why are you chasing such a low yield anyway? There are plenty of decent investments yielding at least 4%.

Bcommercial

strmin wrote: »

We are talking about really silly yield here, so even trip to bank, transfer cost or posting receiving bond certificate can wipe out or reduce your gain.
I can't read German, but most bonds have par value 1000. That means if you see price 101.5, you pay 1015 for one bond. I doubt you can buy 100 euros worth of bonds.

Why are you chasing such a low yield anyway? There are plenty of decent investments yielding at least 4%.

Yes, you are correct as to the relatively low yield, and is it really worth the effort etc. However once the account has been set up, all subsequent buying/selling is done completely online with no transaction costs and your investment is at all times instantly accessible. And this doesn't appear to be your typical bond type but something new set up in 2008 aimed at private investors and functions as a type of instant access savings bank account I suppose, except you're actually buying these bonds directly from the german government. "Bonds" can be bought in as little as €50 amounts, and there aren't any bond certificates either, or as far as I know there aren't, your account just gets debited or credited according as you buy or sell. However unlike a bank a/c the interest rate you receive is changed daily and is always the prevailing Eonia rate less 0.15%, so today it would be 0.86 - 0.15 = 0.71%. Also quite different is the price you have to pay for these bonds which increases each day by the increment of the previous day's interest rate (I think!), (ie yesterday's price + the interest earned @ yesterdays interest rate = today's price), and this is where I start to get unsure as to the value of what I'm buying and when I look to the forum for advice.

My reasons for inquiring into these bonds is not so much because of their yield, but rather as a means of finding a secure place at this time for cash savings outside of Ireland, which is instantly accessible online at all times. Foreign banks would offer higher rates, but you pay for your security by accepting lower rates and the Bunds are supposed to be the safest. Again, all advice very welcome, and if anyone has experience of this exact german day bond type all the better.