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Yankee Bond

Categoria — Tipi di obbligazioni
By Konstantin Vasilev Member of the Board of Directors of Cbonds, Ph.D. in Economics
Updated August 06, 2023

What is a Yankee bond?

A Yankee bond is a type of debt instrument issued by a foreign entity, such as a foreign government or corporation, to raise funds from American investors and tap into the U.S. financial market. The key characteristic of a Yankee bond is that it is denominated in U.S. dollars. However, the Yankee bond issuer is not based in the United States. These bonds are attractive to both issuers and investors: the foreign issuer gains access to a broader and diverse investor base, while U.S. investors can diversify their portfolios by investing in foreign debt without the need to deal with foreign currency exchange risks. Yankee bonds are typically listed and traded on U.S. exchanges, which adds to their liquidity and accessibility.

What is the Yankee market?

The colloquial expression "Yankee market" indeed refers to the stock market in the United States and is commonly used by individuals who are not U.S. residents. The term draws on the slang term "Yankee" or "Yank," which can be used playfully to refer to U.S. citizens but may also carry occasional derogatory connotations, depending on the context and intent of the speaker. The use of "Yankee market" highlights the prominence and influence of the U.S. stock market on the global financial stage. The U.S. market is one of the largest and most influential in the world, attracting investors from various countries seeking opportunities and exposure to American companies.

Who issues Yankee bonds?

Europe is the primary issuer of Yankee bonds, contributing to 40% of the total issuance. Among the European countries, the United Kingdom, Germany, France, Switzerland, and the Netherlands are the top five issuers, collectively accounting for 70% of all Europe’s Yankee bonds and 28% of the global issuance.

What is the difference between Yankee bonds and Eurobonds?

Eurobonds and Yankee bonds are both dollar-denominated debt instruments, but they differ in their trading locations and issuance. Eurobonds are issued by foreign entities but are traded outside their domestic market, typically in a currency other than their home currency. These bonds are usually traded in international financial centers such as London or Luxembourg. On the other hand, Yankee bonds are also dollar-denominated. Still, they are issued and traded within the United States, allowing foreign issuers to directly tap into the U.S. financial market. The distinction between the two lies in their accessibility to investors and the regulatory framework under which they operate, with Eurobonds being more globally accessible and Yankee bonds being specifically targeted at the U.S. market.

Advantages and disadvantages of Yankee bonds

Yankee Bonds offer American investors the advantage of higher returns compared to American bond issuers while also providing an opportunity to diversify their international portfolios. These bonds can reduce foreign exchange risk when investing in foreign companies. For issuers, Yankee Bonds present a potential win-win scenario. They can access cheaper financing capital at a lower cost if U.S. bond rates are significantly lower than those in their home countries. The size and active trading of the U.S. bond market also favor the issuer, especially for large offerings. Although initial regulatory requirements may pose some challenges, overall lending conditions in the U.S. can be less stringent, allowing for more flexibility in the offering process.

However, there are some downsides to consider. One major drawback is the potentially lengthy approval process due to strict U.S. regulations, which can extend beyond three months. Moreover, currency risk remains a concern despite the bonds denominating in U.S. dollars.

The interest rate environment is another consideration, as it can impact the pricing and performance of Yankee Bonds. If interest rates fluctuate significantly after issuance, it may affect how well these bonds are received in the market.

Furthermore, Yankee Bonds can be influenced by the economic situation in the issuer’s home country. Economic instability could lead to price fluctuations or affect the issuer’s ability to make coupon payments. Additionally, some currency risk is still involved, as economic challenges in the issuer’s country may impact its currency’s performance in foreign exchange markets.

What does a reverse Yankee bond mean?

The reverse Yankee market and reverse Yankee bonds refer to U.S. companies that engage in the Euro bond market. In this context, "reverse" indicates that it is the opposite of the traditional arrangement, where non-U.S. entities issue Yankee bonds in the U.S. market denominated in U.S. dollar currency. Instead, in the reverse Yankee market, U.S. companies issue bonds in the Euro bond market, denominated in a currency other than the U.S. dollar, offering an alternative means for them to raise capital and tap into the international investor base.

Example of a Yankee bond

Consider a Yankee bond with a face value of $1000, a coupon rate of 4%, a yield to maturity (YTM) of 4%, and a maturity period of 5 years.

According to the given formula, the bond’s price would be $1000 since the coupon rate and YTM are the same. In cases where the coupon rate and YTM differ, bonds may be sold at either a premium or a discount.

Now, let’s explore the bond prices with YTM values of 3% and 5% while keeping the other variables constant. With a YTM of 3%, the bond price would be $1037.17, and with a YTM of 5%, the bond price would be $964.54. As the YTM decreases, the bond price tends to rise; conversely, as the YTM increases, the bond price tends to fall. When the YTM falls, bonds with fixed coupon rates become more desirable in the market, leading to their availability at a premium.

On the contrary, when the YTM rises, bonds with fixed coupon rates become less appealing compared to other investment options in the market, resulting in their availability at a discount.

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