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) before 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.
Breaking down a 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 creditworthiness 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 can 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 U.S. investors very actively trade it 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 terms of the offering.
A major advantage for U.S. investors in Yankee bonds is such bonds frequently offer higher yields than the yields available on comparable, or even lower-rated, bond issues from U.S. issuers. Another potential advantage is the fact that Yankee bonds offer investors a means of obtaining international diversification in a portfolio of bond investments. Yankee bonds also offer U.S. investors an advantage over investing in foreign corporation bond issues made in the foreign company’s home country. Since Yankee bonds are denominated in U.S. dollars, the currency risk commonly associated with foreign bond investments is virtually eliminated.