What Is a Yankee Bond?

A Yankee bond is a debt obligation issued by a foreign entity, such as a government or company, which is traded in the United States and denominated in U.S. dollars.

key takeaways

  • A Yankee bond is a debt obligation denominated in U.S. dollars that is publicly issued in the U.S. by foreign banks and corporation, and sometimes even governments.
  • Yankee bonds are subject to U.S. securities laws, as they trade on U.S. exchanges.
  • Yankee bonds offer the issuer to chance to get cheaper financing and reach a broader investment audience; they offer investors the chance for better yields.
  • On the downside, Yankee bonds can take a long time to come to market, subjecting them to interest rate risk; they are also vulnerable to currency risk and other problems in their home country's economy.

Understanding a Yankee Bond

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.

There are also Yankee certificate of deposits, CDs that are issued in the United States by a branch or agency of a foreign bank.

Advantages of Yankee Bonds

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 cheaper 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.

Disadvantages of Yankee Bonds

One of the drawbacks of Yankee bonds for issuers is the time involved. 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.

Another consideration is the interest rate environment. 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. But should something send interest rates soaring or plummeting in three months, it could mess up the carefully calibrated pricing of the Yankee bond, affecting how well it sells.

Finally, a Yankee bond can be affected by the economy of its home country. So if that country has a shaky economy, its price could topple, or the issuer could run into problems—which could affect its coupon payments. And while the Yankee bond is issued in dollars, it could be vulnerable to some currency risk as well, as a nation's economic woes often affect its money's performance in the foreign exchange markets.