What is a Placement Ratio?
A placement ratio is a ratio which indicates which percentage of municipal bond issues in a given week were successfully sold. When the ratio is high, it indicates that the market for municipal bonds is strong and there is a lot of interest among underwriters. A low ratio, on the other hand, indicates that the market is sluggish and there is less interest in new issues. In addition to being an indicator for the municipal bond market, the placement ratio may also provide clues about the future direction of the economy in general.
One notable placement ratio is the index calculated weekly on Thursdays by The Daily Bond Buyer, a publication based in New York City which focuses on tracking municipal bonds and reporting on trends. The placement ratio includes only offerings of one million United States Dollars (USD) or more, and is calculated for the previous week. Archives of the publication provide information about placement ratios from previous weeks which can be used to track long term trends.
To find the placement ratio, economists divide the number of municipal bonds sold in a given time period by the number issued. Also known as the acceptance ratio, this number can provide important information about the health of the market for municipal bonds. In addition to being shown as a standalone ratio, it can also be provided in the context of a writeup about bond issues and general economic activity. Publications can also include charts tracking the placement ratio over time for the purpose of illustrating market movements for the benefit of investors.
Municipalities can find it helpful to monitor the placement ratio so that they can time the release of a new issue for a period of interest in municipal bonds, ensuring that they are most likely to get underwriters and move the bonds quickly. If the market is sluggish, new issues may not be well received. Likewise, investors and underwriters are usually interested in trends and the latest figures so that they can make sound decisions about investments.
Some things which can impact the acceptance of an individual municipal bond offering include things like the credit rating assigned to the municipality by rating agencies, past performance on bonds, the size of the offering, and general economic health. In a depressed economy, for example, a municipality with a poor credit rating trying to issue a large bond offering may encounter difficulties.
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