What it means
When a foreign company or government wants to borrow dollars from investors in the United States, it can issue a bond in the American market. These bonds are called Yankee bonds, and the whole segment where they are issued and traded is the Yankee market.
The borrower is foreign but the bond, the investors and the currency are American. Borrowers use the market to diversify their funding and to raise dollars they need to pay for imports or to finance dollar-denominated projects.
A utility in another country that buys US-made equipment, for example, may prefer to borrow in dollars so that its debt matches the currency of its costs. Matching currencies reduces exchange rate risk.
Investors in Yankee bonds receive a yield that includes a credit spread, which is the extra interest over a risk-free government bond that compensates for default risk. Foreign issuers are often rated by US rating agencies, and the spread reflects both the issuer's quality and any country risk.
Pension funds, insurers and mutual funds are major buyers. Issuing in the market usually means meeting United States disclosure requirements, which can be demanding and expensive.
Some issuers use private placements or rules that allow sales to large institutional buyers only, which reduces the paperwork. The trade-off is a smaller pool of investors and sometimes less liquidity.
The Yankee market is one of several foreign bond markets named after the host country, such as the Samurai market in Japan and the Kangaroo market in Australia. They all work on the same principle of a foreign borrower issuing in the local currency under local rules.
A finance team comparing options should consider cost, speed, disclosure burden and investor demand in each. Timing and pricing work differently from a bank loan.
A bond is sold to many investors at once, usually through underwriters, who are banks that guarantee the sale and take a fee. The issuer fixes the coupon at launch, so it must decide whether to borrow now or wait for rates to move.
In practice
Real-world examples.
Example
A mining company based in Latin America needs dollars to buy equipment and issues a Yankee bond to US insurers. Its revenues are in dollars from commodity sales, so a dollar bond matches its income. The company avoids currency mismatch on its debt.
Example
A European bank wants to diversify away from its home market and issues a Yankee bond to American pension funds. Treasury staff compare the all-in cost with euro funding after allowing for the cost of swapping currencies. They proceed because the dollar funding is cheaper and the investor base is new.
Example
A US asset manager adds Yankee bonds to a corporate bond fund to earn a small yield pick-up over domestic issuers. The credit analyst reviews each issuer's country and sector risk as well as its rating. The fund limits total exposure to any one country and reviews the position whenever a rating changes. The extra yield is attractive, but the manager does not want one political event to hurt the whole portfolio.
Formula
Calculation
Yield on a Yankee bond = comparable US Treasury yield + credit spread
Annual interest cost = face value x coupon rate
Suppose a foreign utility issues a 10-year Yankee bond of $500,000,000. The comparable US Treasury yield is 4.00% and the credit spread is 1.20%, so the yield is 4.00 + 1.20 = 5.20%. The annual interest cost = 500,000,000 x 0.052 = $26,000,000, which is normally paid in two instalments of $13,000,000 each.Case study
Seen in the real world.
Southern Cross Energy is an illustrative, fictional power company from an emerging market with dollar revenues from exports. The finance director found that borrowing locally cost more and carried currency risk, since the loans were in the local currency while earnings were in dollars.
The company hired underwriters to prepare a $300,000,000 Yankee bond. It published audited accounts in line with US requirements, held investor meetings in New York and priced the bond at a spread of 1.50 percentage points over Treasuries.
The issue was several times oversubscribed, and the treasury team reduced its local currency borrowing. The illustrative lesson is that choosing the currency and market of a loan can remove a risk, not just reduce a cost.
Watch out
Common mistakes.
- Thinking a Yankee bond is issued by a US company, when it is issued by a foreign borrower in the US market.
- Assuming foreign issuance means foreign currency, when Yankee bonds are denominated in dollars.
- Ignoring the cost of meeting US disclosure rules when comparing the Yankee market with other funding routes.
Questions
People also ask.
What is the Yankee market?
It is the segment of the US bond market in which foreign borrowers sell dollar-denominated securities to American investors.
Why do foreign borrowers use it?
They gain access to a large, deep investor base and can raise dollars to match dollar costs or revenues.
How is it different from the Eurobond market?
A Yankee bond is issued within the United States under US rules, while a Eurobond is issued outside the borders of the currency's home country.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related