Yankee bonds are issued by foreign institutions such as foreign financial institutions and foreign banks. These bonds are issued and traded in the US dollar in the United States. The Yankee bonds are governed under the security Act of 1933. A lot of documentation is required to get the bonds registered. The credit rating of the Yankee bonds is done by the agencies such as S&P, Moody’s.
A trader can also trade in reverse Yankee bonds. The reverse Yankee bonds are issued and traded outside the United States in the currency of the respective country.
The Yankee market is located inside the United States where foreign securities such as Yankee bonds are bought and sold.
Let us assume that a company has a headquarter in Morocco. When the company issues a bond that is denominated in the US dollar in the United States, then the bonds will be termed as the Yankee bonds.
Yankee bonds are similar to bonds, that is, the borrower is obligated to pay the principal amount and certain amount of interest rate in accordance with the terms of indenture. The yanked bonds need to be registered with the SEC and the registration process might take months.
Generally, Yankee bonds and Eurobonds are seen as similar by the investors and confusion is created. However, there is a significant fundamental difference between Yankee bonds and Eurobonds.
Yankee bonds are the US market bonds, on other hand, the Eurobonds are not limited to a market but are a global phenomenon.
There is a misconception that Eurobonds can only be traded in Euros. The misconception arises from the name. However, the Eurobonds can be issued and traded in all currencies. In Eurobond, the bond can be issued in any currency except the country’s currency in which the bond is issued. To illustrate- a company in a European country issues a Eurosterling bond for borrowing sterling, but the bond cannot be issued in sterling. Another example can be an American MNC issuing a Eurodollar bond to raise the US dollar in Britain.
Yankee bonds can extend a significant amount of advantage to the issuers in case they make borrowings inexpensive. The issuer of the Yankee bonds benefits from the favourable lending conditions and regulatory requirements of the US. Moreover, the issuer can take advantage of the large bond market of the US.
Yankee bonds are liked by the investors because they offer the facilities of currency diversification and geographic diversification as well. Tax advantages are also adjoint with the Yankee bonds. The income stream is in the dollar, which can be used by the investors to pay off the dollar-denominated obligations.
However, the investors are exposed to the risks above the standard interest rate risk and credit risks. A dramatic and quick change can be observed in the exchange rates, and it can drastically affect the returns of the foreign investors (non-US investors).
The high yield of the Yankee bonds might attract many investors, however, the risk associated with the bonds should not be ignored. The risk includes the impact of the home country’s economy on the bonds. In case the country of the issuing company is shaky and is not promising, then the returns will be affected. The investor should choose the Yankee bonds carefully and considering the country of the issuers.
The Yankee bonds eliminate the currency risks’ direct impact on the bonds; however, it is crucial to acknowledge that they are affected by the indirect currency risk. When the issuing company is making borrowings in the US dollar and their earnings are in home currency. Any depreciation in the home currency against the US dollar will have an effect on the value of the Yankee bonds.