The Business of Investment Banking

By K. Thomas Liaw | Go to book overview

5
Underwriting Fixed-Income
Securities

The combination of a stable interest rate environment and a non-inflationary economic growth has contributed to the record-breaking levels of activity in the fixed-income markets in recent years. The U.S. Treasury issued a record $2.48 trillion in 1996. Corporate bond issuance reached a record of $448 billion and municipal issues added an additional $227 billion in the same year. In 1997, Treasury issuance declined on strength in tax revenues, but other fixed-income sectors recorded new highs. This chapter first covers the activities in the government securities market, including the auction process, dealer bidding strategies, trading, short squeeze, rolls, and market practices. The discussion of corporate fixed income focuses on the underwriting process, shelf registration, underwriting spreads, and underwriting risk management. The subsequent section is on the rapidly growing 144A market. The last section covers the $1.3 trillion municipal debt market. Important issues in the municipal securities market include competitive bids and negotiated deals, yield burning, regulation, insurance, and market conventions.


GOVERNMENT SECURITIES

As a means of financing the federal government, the Treasury's Bureau of Public Debt (BPD) issues three types of marketable securities: bills, notes, and bonds. Treasury bills are short-term securities with a maturity period of 13 weeks, 26 weeks, or 52 weeks. Treasury notes are medium-term securities with a maturity period of 2 years, 3 years, 5 years, or 10 years.1 Treasury bonds are long-term securities with a maturity period of 30 years. These securities are sold through regularly scheduled auctions. The auction frequency is summarized in Table 5.1.

The 10-year inflation-indexed notes (Treasury Inflation-Protected Securities, TIPS) were first issued in January 1997. Treasury plans to issue these securities quarterly (i.e., in April, July, October and January). In July 1997, a 5-year maturity bond was also issued. The securities have a nominal return linked to the Consumer Price Index for All Urban Consumers (CPI-U). The principal amount of the security will adjust daily for changes in the level of inflation. However, the inflation adjustment will not be

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