What Is a Workable Indication?
Workable indication is a pricing technique, stated as a range, that allows a dealer or broker flexibility when offering to buy or sell a particular debt instrument. It primarily applies to the municipal bond market.
Understanding Workable Indication
A nominal quotation that indicates the price at which a dealer is ready to purchase or sell a particular bond issue is a viable indicator. This offer is not the same as a firm quotation, also known as a bona fide quote, which binds the dealer to complete the transaction at the quoted price if the offer is accepted. Additionally, “firm-with-recall” or “out-firm” bids from municipal bond dealers may be valid for the next hour before being recalled.
A reasonable estimate is often a one-sided quotation, which may be an asking price or a bid price.
Generally, yield-to-maturity is used to determine the price of municipal bonds instead of a monetary amount. A dealer may sell the bond at a price that would result in a 3.5% yield to maturity if they provide a reasonable indication, such as “I last saw this issue being offered at around 3.50.”
Why provide helpful indications?
A nominal quotation presented as a working indication is a preliminary offer, estimate, or even a place to start when trying to reach a mutually beneficial agreement. The feasible signal is not binding on the dealer or broker, who can adjust it if investor interest or market circumstances shift.
A workable indicator gives both sides the freedom to bargain until they arrive at a mutually agreed-upon amount. Flexible ranges are helpful when the dealer is first attempting to close a transaction and may still be assessing the buyer’s level of interest.
The seller may also evaluate the effect of several price points on investors, thanks to the feasible indication. It’s common to hear statements like “It’s somewhere in the neighborhood of…” or “I think it would probably be roughly around…” that are noncommittal and use somewhat ambiguous wording.
If the dealer cannot discover the bond immediately, they cannot assess the issue’s price and supply and provide a definite quotation. Alternatively, a working suggestion may be provided as a starting point for discussion, or it may suggest that the bond is not being actively traded.
Particular Point to Remember
It’s essential to comprehend the environment where muni purchases and sales often occur to completely grasp how a feasible signal strategy may be used in a bond-trading situation. Municipal bond trading usually takes place in an interdealer or secondary market. This is the bond market where bond dealers are selling issued munis and where institutional investors (banks, bond funds, insurance companies), retail (individual) investors, and small businesses go to buy bonds.
Regarding movement, the municipal bond market is often slower-paced than the stock market. This is because there is less need to make judgments quickly. Players are not required to move quickly. Instead, they might find the best feasible bargain by haggling and considering the offer. A possible indicator is often where the transaction process begins in such a setting.
Still, there’s always a chance that a different buyer may jump in and show interest in a specific issuance, even in the municipal bond market. The situation may become more competitive, forcing purchasers to make quick decisions on whether to raise their bids or withdraw from the competition.
Conclusion
- When purchasing or selling municipal bonds, a price strategy called a workable indication is used.
- Similar to an estimate or first bid, a feasible indication is a notional quotation expressed as a range and not binding on the dealer providing it.
- A definite quotation, if accepted, does commit the dealer; a feasible indication does not.
- To assess investor interest or because they are currently unable to identify a particular bond, a dealer could provide a reasonable suggestion as a starting point for talks.
- The muni bond secondary markets, often slower and more laid-back than stock markets, have workable signs.
