Love & Hate: Issue #3 - Jargon
A CrossStack sub-blog on the good, the bad, and the ugly in the world of finance
Love: Jargon
What follows is a translated conversation between a bond trader (the broker/dealer) and his client (the investor).
-
Dealer: Hey Joe, good morning!
Translation: I would like to sell you bonds.
Investor: Thanks man, you too.
Translation: I would buy bonds at the right price.
Dealer: I’ve got some XYZ bonds on offer – you like that name?
Translation: I have some XYZ bonds for sale – do you like the credit quality of XYZ?
Investor: Nah, it’s too cuspy for my taste.
Translation: No, it has certain risk characteristics that could lead to a rapid decline in price (i.e., it’s on the “cusp”).
Dealer: Yeah, I saw these on a custy BWIC last week, but it DNT’d. I showed it out to a couple of holders with matchers, but no dice.
Translation: A customer of ours attempted to sell it in a private auction known as a BWIC (pronounced: B-wick), which stands for “bids wanted in competition.” While I showed it to some investors with matching positions (who would presumably be most in the know about a “cuspy” security), it nevertheless “did not trade” (i.e., “DNT,” pronounced: D-N-T.)
Investor: Not surprising. Were you engaged?
Translation: Did anyone make a serious bid?
Dealer: Some joker tried to cross it and failed, but otherwise no action.
Translation: A market participant attempted to buy the bonds from me and immediately flip them to another dealer at a higher price (i.e., a “crossing” a bond).
Investor: You’ll fill the right account at some point.
Translation: You’ll sell it to the right investor.
Remember, “there’s no bad bonds, just bad prices.”
Note: This is the credit lesson for today. Read that line back carefully. Everything has a price – everything. It may not be a good one, but you should be able to price anything.
—
Dealer: Absolutely. So how about these other ABC bonds, you might like them?
Investor: I’m not axed, but maybe. What’s the context?
Translation: I’m not strongly inclined, but perhaps. What’s your indicative offer price range?
Dealer: Low/mid 90’s.
Translation: I would sell them in the $91-94 range.
Investor: That’s pretty full. It just printed at $88. What spread do you see there?
Translation: That’s quite a high offer. That bond recently traded at $88. What returns on a spread basis (e.g., the number of basis points over the benchmark) do you predict if I buy this bond in the $91-94 range?
Dealer: Call it 300-350. Lots of upside to the call though
Translation: A spread of 3.00-3.50% over the benchmark curve. If the issuer “calls” the deal i.e., prepays the debt early at a pre-arranged price, usually par or at a slight premium, your potential return is much higher.
Investor: Is there any flex? I would bid them $89 area.
Translation: Do you have any room for negotiation? I would pay $89, plus or minus $1.
Dealer: I need a 9-handle. For context, this bond was trading at a premium not too long ago.
Translation: I am seeking at least $90. This was trading over par (e.g., 100 cents on the dollar) recently.
Investor: Didn’t see that… Any color?
Translation: I had no idea. Can you share any more information?
Dealer: Yeah, think it was a quiet BWIC. Bonds traded away but we covered at $100.50.
Translation: The seller was looking to quietly market his bonds, so he sent out the BWIC to a small number of dealers and requested that dealers not “blast it out” (i.e., that we do not send to our clients). However, we did not win the bonds (“traded away”) but we were the second-highest bid (“cover”) at $100.50. (Side note: covers or trade “contexts” are usually the information that gets shared in the market, not exact trade prices)
Investor: Got it. Taking a closer look…how about 90-8/?
Translation: Perhaps $90.25/? (The “-8” refers to the bond market convention whereby bonds are priced in 1/32 increments, so 8/32 = 0.25). Also, a market (bid/ask) for any particular bond is generally defined as X/X+vig. so a bid is often denoted with the “/” following the number (90-8/) and an offer typically shown before the number (/94-00).
Dealer: I could maybe let it go for a few ticks higher.
Translation: How about a few thirty seconds higher (each 1/32 is a “tick”)?
Investor: What’s the size?
Translation: How much do you have available for sale?
Dealer: $3 million with a small tail.
Translation: $3 million with some fractional interest above that (e.g., $3,146,000)
Investor: Oh man, it’s an oddie?
Translation: It’s an odd-lot? (i.e., it’s not a “round lot” – like $5 million.) Generally infers that the buyer should receive some sort of discount for buying a smaller size.
Dealer: I hear you. Something I’m looking to churn, so yours at /$90-16 if you care.
Translation: I admit the “oddie” may be less liquid than a round lot if you ever had to sell it. But I’m looking to show progress and turn over my book, so I’ll offer it to you at $90.5. Where you “care” indicates the level at which you would transact.
Investor: Is that firm?
Translation: Pinky swear that you’d transact at that price?
Dealer: Firm.
Translation: I’d shake on it if it weren’t for COVID.
Investor: Mine. Thanks
Translation: It’s a deal, I will buy it
Dealer: Just to be clear, that’s a lift?
Translation: So we’re clear, you are buying at $90-16? (To “lift” an offer is the opposite of “hitting” a bid.)
Investor: Yep.
Dealer: Done, thanks.
Translation: Consider this trade completed.
Investor: Great, let’s grab a beer.
Translation: It’s been a pleasure doing business with you.
Dealer: I’m buying!
Translation: My company will gladly pay for it!
—
If you enjoyed this post, we’d love for you to subscribe/share it with others:
—
This is a personal blog collaboration. All views and opinions expressed are those of the authors and do not reflect the views or opinions of any organizations the authors may be affiliated with. This website and the information contained herein is not intended to be a source of advice with respect to the material presented, and the information contained in this website does not constitute investment, tax, or legal advice. We make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on this site.