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 the Securities and Exchange Commission (SEC) before offering the bond for sale. Hence, U.S. investors can purchase the securities issued by the foreign entity without worrying about the price fluctuation created by 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 interest 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. A Yankee bond is issued by a non-United State entity in the United State market. Thus, when the size of United State bond market increases and there is more trading activity by U.S. investors, it will bring higher returns to the issuers. Besides, Yankee bonds have few potential advantages for foreign firms seeking to raise new capital.

Risk
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 U.S. investors to the yields available on comparable, or even lower-rated of bond issues from U.S. issuers. The foreign investors face credit risk and interest rate risk, due to the fact that exchange rates can change quickly and dramatically. Hence, they affects the total return for non-U.S. investors. Yankee bonds avoid from currency risk by issuing in dollars.

Reverse Yankee Bond
Yankee bonds have been a backbone of the U.S. fixed-income market for several decades. Since 2003, a type of bonds called Reverse Yankee Bond emerged in the worldwide market. In general, the Reverse Yankee Bond is a bond, mostly of a higher grade, issued by a U.S. company outside the U.S., and denominated in a currency other than the U.S. dollar. This bond is governed by Securities Act of 1933, and later on registered under Securities and Exchange Commission (SEC). U.S. companies issued a record €45 billion of euro-denominated bonds in the first seven months of 2015 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. This is because 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 Bonds enter 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, the United States was the biggest source of issuers in the Euro bond market. As reported by Dealogic, U.S. backers represented 23% of all euro-designated bond issues in 2016.

References

Category:Bonds in foreign currencies