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Yankee Bond



Definition

A Yankee Bond is a debt security issued by foreign entities, such as corporations or governments, in the U.S. bond market denominated in U.S. dollars. These bonds are subject to U.S. regulations and are a way for foreign issuers to access the large and diverse U.S. debt market. Thus, they serve to diversify funding sources and often have lower borrowing costs compared to the issuer’s domestic markets.

Phonetic

The phonetic spelling of the keyword “Yankee Bond” is: Yankee – ˈyæŋ.kiBond – bɑnd

Key Takeaways

  1. Yankee Bonds are debt securities issued by foreign entities, such as governments or corporations, in the United States and denominated in US dollars.
  2. These bonds afford foreign institutions access to the large and liquid US bond market, potentially providing lower borrowing costs and diversification of funding sources.
  3. Investors in Yankee Bonds may benefit from portfolio diversification and potentially higher yields compared to domestic bonds, but they also face potential risks associated with the foreign issuer’s creditworthiness, currency fluctuations, and geopolitical events.

Importance

The term Yankee Bond is important in the realm of business and finance because it represents a debt instrument through which foreign entities can obtain capital from the U.S. market. Issued by non-U.S. entities but denominated in U.S. dollars, these bonds enable borrowers to diversify their funding sources while taking advantage of the liquidity and depth provided by the U.S. market. At the same time, U.S. investors benefit from Yankee Bonds by gaining exposure to foreign credit and potentially higher yields without bearing currency risk. The presence of Yankee Bonds enhances the overall efficiency and interconnectedness of global financial markets, as well as fostering cross-border financial relationships.

Explanation

The Yankee bond serves to benefit both international issuers and investors within the U.S. market. For issuers, particularly those based in foreign countries, the primary purpose of issuing a Yankee bond is to tap into the vast U.S. debt market and to diversify their sources of funding. By issuing debt in the U.S., foreign entities can access a broader investor base, which may offer lower borrowing costs and better liquidity compared to their domestic markets. Moreover, it allows foreign entities to hedge their currency exposure by raising funds in U.S. dollars and financing their dollar-denominated projects or assets. From the perspective of U.S. investors, Yankee bonds offer diversification benefits and opportunities to invest in foreign entities without currency risk since these bonds are denominated in U.S. dollars. These bonds also provide exposure to international credit markets, which may otherwise be difficult to access or may come with significant foreign exchange risks. Additionally, Yankee bonds may potentially offer more competitive yields in comparison with domestic issuances due to differences in credit ratings and market conditions. Overall, Yankee bonds have a unique role in bridging international issuers and the U.S. investor base, fostering capital flows across markets while offering attractive investment alternatives and risk-diversifying capabilities.

Examples

A Yankee bond is a debt instrument issued by a foreign entity, such as a government or company, in the US bond market, denominated in US dollars, and regulated by the Securities and Exchange Commission (SEC). Here are three real-world examples: 1. Toyota Motor Credit Corporation: In 2020, Toyota Motor Credit Corporation, a subsidiary of the Japanese automaker Toyota, issued a series of Yankee bonds valued at US$1.25 billion. These bonds were debt securities issued to raise capital in the US market to finance Toyota’s operations and expansion plans globally. 2. The Republic of Italy: In 2017, the Italian Government issued Yankee bonds worth $2.5 billion. The bond offering consisted of 10-year bonds with a fixed annual coupon rate. The proceeds were used to help finance Italy’s budget, strengthen its foreign currency reserves, and diversify its investor base by attracting US investors. 3. Petrobras: In 2016, Brazil’s state-run oil company Petrobras issued a series of Yankee bonds worth US$4 billion. These bonds were debt securities intended to help the company reduce its dollar-dominated liabilities and refinance its outstanding debt.Each of these examples illustrates the use of Yankee bonds by foreign companies or governments to access the US financial market, raise capital in US dollars, and diversify their investor base.

Frequently Asked Questions(FAQ)

What is a Yankee Bond?
A Yankee Bond is a debt security issued by a foreign entity, such as a company or government, in the United States for the purpose of raising capital. The instrument is denominated in U.S. dollars and is subject to the regulations and laws of the U.S. market.
Who issues Yankee Bonds?
Foreign corporations, financial institutions, and governments issue Yankee Bonds to raise funds in the U.S. market. These entities may prefer to tap into the large and liquid U.S. bond market to access a diversified investor base or to take advantage of more competitive interest rates.
What are the advantages of investing in Yankee Bonds?
Yankee Bonds can offer investors higher yields compared to domestic bonds, diversification benefits by investing in foreign entities, and access to a wider range of investment opportunities. Furthermore, since Yankee Bonds are denominated in U.S. dollars, they eliminate the currency risk associated with investing in foreign bonds.
What are the risks associated with investing in Yankee Bonds?
Risks associated with Yankee Bonds include credit risk, interest rate risk, and regulatory risk. Credit risk is the risk of the issuer defaulting on its debt obligations, which might be higher for foreign entities compared to domestic ones. Interest rate risk is the potential for bond prices to fall as interest rates rise. Regulatory risk arises due to potential differences between the governing laws and regulations of the issuing country and those of the United States.
How are Yankee Bonds traded?
Yankee Bonds are primarily traded over-the-counter (OTC) through broker-dealers, trading desks, and electronic trading platforms. Just like other U.S. corporate bonds, Yankee Bonds are traded in the secondary market.
How do Yankee Bonds differ from Eurobonds and Bulldog Bonds?
While all three types of bonds are issued by foreign entities, the key difference lies in the market they target and the currency they are denominated in. Yankee Bonds are issued in the U.S. market and are denominated in U.S. dollars, Eurobonds are issued in countries other than the issuer’s home country and can be denominated in any currency, and Bulldog Bonds are issued in the United Kingdom and are denominated in British pounds.
Are Yankee Bonds subject to taxes?
For U.S. investors, interest income earned from Yankee Bonds is taxable just like any other interest income earned from domestic bonds. Non-U.S. investors may be subject to taxes in their home country or as per any applicable tax treaties.

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