A Yankee bond is a US dollar-denominated debenture, issued by a foreign government or a company and traded in the United States. The issue of a security in the USD helps to protect the issuer from fluctuations in currency exchange rates.
More about Yankee Bonds
Yankee bonds are regulated by the Securities Act of 1933, which obliges to register bonds in the Securities and Exchange Commission (SEC) before being sold. These debt obligations are evaluated by different rating agencies, and Yankee bond interest rates are determined based on these assigned ratings.
Foreign firms issue Yankee bonds when US interest rates are low. It allows them to borrow funds at a lower rate than if these bonds were issued in their country of origin. Yankee Bonds also allow reducing foreign exchange risk when investing in foreign firms.
Benefits of Yankee Bonds
Yankee bonds are interesting for both issuers and investors. For a Yankee bond issuer, obtaining financing at a lower cost is one of the distinct advantages of this bond type, because comparable US bond rates are considerably below current levels of rates in a firm's own country.
The issuer also benefits from the fact that bond trading is very popular among investors from the USA, and the US bond market is quite broad. In addition, lending conditions in the US may be less stringent than in the issuer's own country, giving the issuer more flexibility.
Yankee bonds provide investors with the opportunity for to internationally diversify their bond investment portfolio and to gain a high return. In addition, the foreign exchange risks associated with investing in foreign bonds are virtually eliminated as Yankee bonds are issued in the USD.
Drawbacks of Yankee Bonds
Time is the main disadvantage of these debt obligations. The issuance, together with the approval, can take more than three months. This process also includes an assessment of the issuer's creditworthiness by a reputable rating agency.
Another argument is the possible change in the interest rate. Foreign companies tend to issue these bonds at the moment of low interest rates in the US, because this may mean that the issuer can offer bonds with lower interest payments. However, if interest rates rise three months later, followed by a sharp fall, this could spoil the thoroughly calibrated price of Yankee bonds, which will affect the success of their sale.
The original country's economy of a Yankee bond can also have an impact on it. If the economy is unstable in that country, the price of the bond may fall, and the issuer may have problems, which will have an effect on its coupon payouts. Even though Yankee bonds are issued in dollars, they are still subject to a negligible amount of currency risk, since the economic problems of the country in one way or another affect the behavior of its currency in the foreign exchange markets.