What is a ‘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. Yankee bonds are governed by the Securities Act of 1933, which requires the bonds to be registered with the Securities and Exchange Commission (SEC) prior to being offered for sale. Yankee bonds are frequently issued in tranches, individual portions of a larger debt offering or structured financing arrangement that have differing risk levels, interest rates and maturities, and offerings may be extremely large, as much as $1 billion. Next Up Yankee CD Yankee Market Bond Yankee Certificate Of Deposit
Explaining ‘Yankee Bond’
One of the drawbacks of Yankee bonds for issuers is the time involved in offering a bond for sale. Because of strict U.S. regulations for the issuing of such bonds, it can take more than three months for A Yankee bond issue to be approved for sale. The approval process includes an evaluation of the issuer’s credit worthiness by a debt-rating agency such as Moody’s or Standard & Poor’s. Foreign issuers usually favor issuing Yankee bonds when there is a low interest rate environment in the United States, since that means the issuer is able to offer the bond with lower interest payments.
Advantages of Yankee bonds for Issuers and Investors
Yankee bonds can represent a win-win opportunity for both issuers and investors. One of the primary potential advantages for A Yankee bond issuer is the opportunity to obtain financing capital at a lower cost if comparable bond rates in the United States are significantly lower than the current rates in a foreign company’s own country. The size of the U.S. bond market and the fact it is very actively traded by U.S. investors also confers an advantage for the issuer, especially if the bond offering is a large one. Although U.S. regulatory requirements may initially hamper a foreign issuer in regard to obtaining approval to offer bonds, conditions for lending in the United States may still be less stringent overall than those in the issuer’s own country, allowing the issuer greater flexibility in the terms of the offering.
Refunding bonds
The New York Yankees are raising nearly $1 billion through a new bond issue through the city. While baseball attendance is expected to decline over the next several years, the Yankees’ enthusiasm is still strong enough to keep the team going. The New York City Industrial Development Authority plans to issue $923 million in PILOT Revenue Refunding bonds to refinance municipal bonds used to build the new Yankee Stadium. This stadium opened in 2009. The bonds are rated BBB+ by Fitch Ratings, which indicates a low risk of default.
The main advantage of a Yankee bond is the higher yield. Unlike other types of bonds, these are denominated in U.S. dollars, which gives them a unique international diversification advantage. The issuer also has an edge over foreign corporate bonds, as the price of a Yankee bond is usually denominated in U.S. dollars. Because of this, a Yankee bond can have a higher value than a comparable U.S. bond.
Term bonds
The first term bond was issued by Reliance Industries Ltd. in India in 1971. Since then, the Yankee Bond has become the benchmark of corporate bonds. Its initial issue was $50 million and was repaid over 50 years. In contrast, a reverse Yankee bond will be worth less than its face value if the domestic currency depreciates. Thus, investors should consider this fact when making an investment. The longer the tenure of a Yankee bond, the greater the yield.
A Yankee bond is a dollar-denominated bond issued by a foreign company or government. It is traded in US dollars, and its price fluctuates depending on changes in U.S. interest rates and the financial condition of the issuer. If you are an investor, it is best to understand the difference between a Yankee Bond and a Eurobond. However, before investing in any Yankee bond, you should check its credit rating.
Reverse Yankee bonds
While the US is in the midst of its own monetary-easing cycle, U.S. companies are now issuance massive amounts of euro-denominated debt in Europe. This growth is primarily driven by the low yields and tight corporate spreads in Europe, and this trend is expected to continue. Reverse Yankee bonds offer attractive valuations and diversification opportunities. Approximately 30% of total reverse Yankee bond issuance this year is expected to originate from U.S. issuers.
Reverse Yankees are a new market sector offering European investors exposure to the names of U.S. companies without the currency risk. Because of their higher quality and performance dynamics, these bonds are an excellent way to diversify a portfolio and potentially generate alpha. While they may not offer the same returns as European stocks, they are an excellent long-term opportunity for investors looking for an alpha source in a rising market. In addition to allowing for diversification, reverse Yankee bonds offer potential alpha sources for portfolios.
Currency mismatch
Despite the similarities in their meanings, there is some significant difference between a currency mismatch and a Yankee Bond. The former is a problem caused by the imbalance in the yields of the two instruments. A currency mismatch occurs when the two currencies cannot be converted into one another in the same amount of time. Consequently, a currency mismatch can cause financial difficulties for a country. Consequently, it is essential to learn more about currency mismatches.
Another difference between a Yankee Bond and a traditional bond is that the latter is a bond that is issued in the home currency USD and is repaid in that same currency. Unlike a traditional bond, a Yankee bond is actively traded in US debt markets. As such, it provides the best liquidity for bond investors. Additionally, because of its longer duration and wider availability of funds, a Yankee bond is likely to have a lower cost than a bond in any other market.
