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Yankee Bond

Definition

A Yankee Bond is a bond issued by a foreign entity, such as a bank or company, but is issued and traded in the United States and denominated in U.S. dollars. For instance, Company ABC is headquartered in France. If Company ABC issues bonds in the United States that are denominated in U.S. dollars, the bonds are Yankee bonds. Yankee bonds are normally issued in tranches, a large debt structure financing arrangement into a lot of portion, each portions have different level of risk, interest rates and maturities, and the value of investment grouping might be extremely high, as much as $1 billion. U.S. investors buy Yankee bonds to branch out into overseas markets. Yankee bonds are same with other bonds which will require the borrower to pay a certain interest rate and principal amount according to the terms of the indenture. Yankee Bonds are administered by the Securities Act of 1933. A non-American company will sell bonds in United States to raise capital from American investors.

wikipediaSource: Wikipedia
Last Sourced: 2017-08-01
This Article has been Edited for Accessibility

Yankee Bond

A Yankee Bond is a bond issued by a foreign entity, such as a bank or company, but is issued and traded in the United States and denominated in U.S. dollars. For instance, Company ABC is headquartered in France. If Company ABC issues bonds in the United States that are denominated in U.S. dollars, the bonds are Yankee bonds. Yankee bonds are normally issued in tranches, a large debt structure financing arrangement into a lot of portion, each portions have different level of risk, interest rates and maturities, and the value of investment grouping might be extremely high, as much as $1 billion. U.S. investors buy Yankee bonds to branch out into overseas markets. Yankee bonds are same with other bonds which will require the borrower to pay a certain interest rate and principal amount according to the terms of the indenture. Yankee Bonds are administered by the Securities Act of 1933. A non-American company will sell bonds in United States to raise capital from American investors. Therefore, the issuers from non-American company have to register Yankee Bonds with Securities and Exchange Commission (SEC) before offer the bond for sale. Hence, U.S. investors can purchase the securities that issued by foreign entity without worried about the price fluctuation that affected by the changes in currency exchange rates. Yankee bond prices are mostly influenced by the variations of interest rates in U.S. and the financial condition of the issuer.

Return

If current rates in a foreign company’s own country are higher than the comparable bond rates in the United States, investors are able to obtain financing capital at a lower cost. Yankee bond was issued by a non-United State entity in the United State market. Thus, when the size of United State bond market increase and more actively trade by United State investors, it will bring more return to the issuers. Besides, Yankee bonds have few potential advantages for foreign firms seeking to raise new capital.

Risk

Risk of Yankee bond can represent a win-win opportunity for both issuers and investors. According to Bell (2011), the higher credit risk, the higher the yield bonds, this reflects on the Yankee bond risk. Yankee Bonds frequently offer higher yields for United State investor compare with the yields that available on comparable, or even lower-rated of bond issues from U.S. issuers. The foreign investors facing credit risk and rate risk, due to the fact that exchange rates can change quickly and dramatically. Hence, affects the total return for non-United State investors. Yankee bonds avoid from currency risk by using the method issued in dollars.

Revolution of Yankee Bonds

Yankee bonds have been a backbone of the U.S. fixed-income market for several decades. In recent years, a lot of companies in U.S. issued debt in Europe. There are doing the reversal of Yankee Bond, so the bonds called as Reverse Yankee Bond.

Reverse Yankee Bond

In 2015, there is a new type bond that has emerge in the worldwide market called, Reverse Yankee Bond. In general, the Reverse Yankee Bond is a type of bond that has been issued by the US Company, mostly in higher grade outside the US, and its currency been denominated other than the US dollars. This bond is governed by Securities Act of 1933 which later on being registered under Securities and Exchange Commission (SEC). The reason why Reverse Yankee Bond is being exist is because US companies have issued a record €45 billion of euro-denominated bonds by taking the advantage of low pricing relative dollars and Europe’s increasing accessibility to international borrowers. The Trump administration has made clear its aim to change the regulatory landscape for businesses, and if the rumoured end to the tax-deductibility of interest expense on debt becomes reality, it would likely lead to further expansion of the reverse-Yankee market. Why? American firms would be incentivized to issue bonds offshore in much the same way that many currently try to book profits overseas, in order to minimize the tax burden on their onshore profits. There are also three further growth that drives this type of bonds: Globalisation, Currency Volatility and issuing euro-denominated debt.

Reverse Yankee Bond dominate Euro Bond market

Reverse Yankee Bond enters into European market by foreign issuers, which has emerged for the current year in spite of prosaic name. This is because United State (US) organizations are offering a large and traded into Euro- denominated bonds to reflect diverging monetary policy on either side of the Atlantic. Besides, US bonds yields sitting well over those in the Euro zone, a large number of blue-chip organizations have sold Reverse Yankees bonds to lock in lower borrowing costs. According to (Merkle, 2016), in year 2015 and year 2016 US based issuers issued record volume of Reserve Yankee Bonds to take benefit of low yields in Europe and the disadvantages of the euro. In 2015, United State (US) was the biggest source of issuers in the Euro bond market and as indicated by Dealogic, U.S. backers had represented 23% of all euro-designated bond issues in 2016.


Additional Resources

  1. 'yankee Bond' Issues Set A Record [pages.stern.nyu.edu]
  2. Chapter 9: Non-u.s. Bonds [web.stanford.edu]
  3. Foreign Companies Raising Capital In The United States [law.upenn.edu]
  4. Top 10 Biggest Federal Subsidies For Pro Stadiums (hint: The Yankees ... [brookings.edu]
  5. Tax-exempt Municipal Bonds And The Financing ... [brookings.edu]
  6. Why Are Interest Rates So Low, Part 4: Term Premiums [brookings.edu]