Yankee bond

DEFINITION: The phrase “Yankee bond” refers to a debt instrument issued by a foreign (that is, non-US) government or corporation, which is denominated in US dollars and is traded within the territory of the US.

ETYMOLOGY: The origins of the phrase “Yankee bond” are uncertain.However,one plausible theory attributes the phrase to the London-based investment bank S.G. Warburg & Co., which was engaged during the 1960s in facilitating the issuance of US dollar-denominated bonds by non-US entities for sale in the US.

The English proper noun “Yankee” is attested from the eighteenth century. Its origins are unknown.

The English common noun “bond” is attested from the twelfth century. Its economic sense is closely connected to the basic sense of “restraint,” “fetter,” “band,” or “cord.”

“Bond” derives, via Middle English bond or band, from Old Norse band. The latter is akin to the Old English verb bindan, meaning “to bind.”

USAGE: Despite their foreign origin,Yankee bonds are subject to regulation by the US Securities and Exchange Commission (SEC), under the provisions of Securities Act of 1933.

Yankee bonds are commonly released in “tranches,” that is, distinct segments of a broader debt issuance or structured financial plan. The various tranches may carry different maturity dates, interest rates, and levels of risk.

Yankee-bond offerings may be quite substantial in size, some reaching as high as $1 billion.

Yankee bonds may also take the form of certificates of deposit (CDs). These are CDs issued within the US by a branch or agency of a foreign bank.

Yankee bonds may present a mutually beneficial opportunity both for those issuing the bonds and for investors.

Among the principal potential benefits of Yankee-bond issuers is the chance to secure more affordable financing capital. This is especially true if comparable US bond rates are considerably lower than the prevailing rates in the foreign company’s home country.

The enormous scale of the US bond market, as well as the active engagement of US investors trading in it, also bestow an advantage upon the issuer, especially if the bond offering is of a substantial size.

A major advantage for US investors presented by Yankee bonds is that such bonds frequently offer higher yields than the yields available on comparable, or even lower-rated, bond issues from US issuers.

Another potential advantage is the fact that Yankee bonds offer investors a chance to diversify their bond portfolio with international investments.

Yankee bonds also offer US investors the advantage of investing in foreign corporation bond issues made in the foreign company’s home country. Since Yankee bonds are denominated in US dollars, investing in them virtually eliminates the currency risk commonly associated with foreign bond investments.

Looked at from the other point of view, Yankee bonds may be advantageous for the foreign issuing company for several reasons.

While US regulatory requirements might initially pose some challenges for foreign issuers in terms of obtaining approval for their bond offering, the lending conditions in the US could still be less strict overall than those in the issuer’s own country.

This means that, in spite of the challenges, the greater maneuverability US conditions may provide to the issuer may make Yankee bonds attractive on balance.

In 2003, so-called “reverse Yankee bonds” emerged on the market.

These bonds are typically of very high quality. They are issued by US corporations in foreign (non-US) markets and are denominated in a currency other than the US dollar.

Reverse Yankee bonds are also subject to mandatory registration with the SEC.