The process of pre-selling, issuing and confirming transactions on underwritings of corporate and municipal bonds is called a placement. Treasury bonds are auctioned rather than underwritten, and the process is slightly different, but it can still be called bond placement. In 2010, $6.7 trillion in new bond issues were sold as compared with 164 stock IPOs in 2010, only a few of which issued $1 billion worth of stock.
Most bonds are bought by large institutional investors such as pension funds, investment advisers, mutual funds, banks and insurance companies. They buy hundreds of millions, and even a billion dollars or more of an issue of bonds -- particularly Treasury bonds. They do business directly with the institutional trading desks at large brokerage firms and banks, where they have specific institutional bond brokers who manage their accounts.
Corporate and municipal bonds are underwritten by brokerage firms and banks that form a syndicate to distribute the issues. The syndicate is made up of from three to 20 or more large-and medium-size brokerages and banks. They pool money in the amount of the intended bond offering to underwrite, or buy the bonds from the issuing corporation or municipality. Since they all have money in the deal, they have extra incentive to make sure their institutional brokers sell out their portion of the bond issue. When this syndicate is formed, the pre-sell period begins.
During the pre-sell period, institutional brokers call their clients and give them information about all the bonds expected to be issued in the next few days. The clients then express interest in bonds they might buy, and indicate the price they would be willing to pay. This price is expressed in terms of yield-to-maturity. Treasury bonds are not underwritten, but brokerages and banks assist the Treasury in auctioning their bonds by buying large blocks to trade, and by submitting bids from their institutional clients. Institutional brokers take bids from their clients for specified numbers of bonds at specified yields to maturity.
In the case of corporates and municipal bonds, the bond brokers report to their syndicate managers how many bonds their clients will buy at what price. They report this information to the managing underwriter who waits until the issue is mostly pre-sold, and then prices the issue according to the price feedback received from syndicate members. When the issue is priced, all bond brokers call their clients to report the price and confirm that the client intends to buy the bonds. For Treasury bonds, the Treasury announces the range of bids it has accepted for the issue. Not all bidders receive bonds, so they must buy their bonds on the open market. After the Treasury auction, bond brokers call their clients to report whether they bought bonds or if their bids were rejected.
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