What is Workable Indication?
Workable indication is a pricing technique, stated as a range, which permits a dealer or broker flexibility when offering to buy or sell a particular debt instrument. It is primarily used in the municipal bond market.
Key Takeaways
- A workable indication is a pricing method used in the trading of municipal bonds.
- It is a nominal quote, stated as a range, that serves as an estimate or initial bid and is not binding on the dealer offering it.
- Unlike a firm quote, a workable indication does not commit the dealer if it is accepted.
- Dealers may offer a workable indication as a starting point for negotiations, to gauge investor interest, or because they can’t locate a particular bond right away.
- Workable indications typically appear in the secondary municipal bond market, which is generally slower and less hectic than stock markets.
Understanding Workable Indication
Simply put, a workable indication is a nominal quote showing the price at which a dealer is willing to either buy or sell an individual bond issue. This offer differs from a firm quote, which is binding: The dealer must follow through with the deal at the specified price if accepted. Municipal bond dealers often also provide “firm-with-recall” quotes that can be honored for about an hour, after which they can be recalled.
A workable indication is usually a one-sided quote, either a bid price or an asked price. Municipal bonds are typically priced on a yield-to-maturity basis rather than a dollar price. For instance, if a dealer gives a workable indication like “I last saw this issue being offered at around 3.50,” they’re indicating that they might sell the bond at a price resulting in a 3.5% yield to maturity.
Why Issue a Workable Indication?
Nominal quotes expressed as workable indications might be seen as estimates, initial offers, or starting points for negotiations to reach a mutually agreeable deal. The dealer or broker is under no obligation to honor the workable indication and can revise it if market conditions or investor interest change.
Workable indications allow both parties flexibility to negotiate until specific figures are reached. Such flexible ranges are handy when the dealer is in the preliminary stages of making a deal and gauging potential buyers’ interest.
The workable indication lets sellers assess the impact of various price levels on investors. It may often be delivered using non-committal language, such as “It’s somewhere in the neighborhood of…” or “I think it would probably be roughly around…”
A workable indication may be proposed as a starting point for negotiation, or it may indicate that the bond is not actively traded at the moment. Since the dealer can’t immediately locate it, they can’t accurately estimate the price and supply of the issue to offer a firm quote.
Special Considerations
To fully grasp how workable indication is used in bond trading, it’s crucial to understand the municipal bond market environment. Municipal bond trading generally occurs within a secondary or inter-dealer market. This is where institutional investors—like banks, bond funds, and insurance companies—retail (individual) investors, and small businesses buy bonds, and where bond dealers offer issued munis for sale.
In contrast to the stock market, which tends to be more fast-paced with frantic activity and pressure to make quick decisions, the municipal bond market is more relaxed. Participants don’t have to move swiftly. They can take time to haggle and ponder over the offer while trying to negotiate the best possible deal. In such a market atmosphere, a workable indication often serves as the starting point of transactional negotiations.
However, it’s essential to note that even in the muncipal bond market, there’s always the risk of another buyer showing interest in a bond issue. This scenario could make the environment more competitive, and buyers might need to quickly decide whether to enhance their offers or withdraw from the bidding.
Related Terms: Nominal Quotation, Yield to Maturity, Firm Quote, Inter-Dealer Market.
References
- ThisMatter.com. “Municipal Bond Trading”.
