What is a Yankee Bond?

A bank or corporation issues bonds to receive funds from investors who buy the bonds. The bank or corporation then repays the investors with interest at the maturity date of the bonds. The Yankee bond is denominated in US Dollars (USD) and is publicly issued in the United States, but the issuer is a foreign bank or corporation. The issuer often sells these bonds in tranches, each with a value of up to $1 billion USD. The Yankee bond benefits both the issuers and investors.

Stringent regulations and standards apply to Yankee bonds, so the public offering process could take up to 14 weeks. The Securities Act of 1933 requires that these bonds be registered with the Securities and Exchange Commission (SEC). Debt-rating agencies also have to evaluate the issuer's credit worthiness. The complexity and expense of issuing Yankee bonds in the U.S. drives some banks and corporations to trade USD elsewhere.

Despite these regulations, some foreign issuers choose to sell USD bonds in the U.S. because of the size of the U.S. market, which lets issuers borrow larger amounts of USD than possible in their home countries. Releasing Yankee bonds allows the issuer to obtain enough USD, a currency commonly used in international trade. Issuing the bonds in the U.S. also protects the issuer from fluctuations in currency exchange rates. Other potential drawbacks that they can avoid by issuing Yankee bonds include having to pay foreign taxes and having to comply with more complicated regulations and standards in their home countries. The banks and corporations that often issue Yankee bonds come from Canada, the UK, and Germany.

U.S. investors buy Yankee bonds to diversify their portfolio. Yankee bonds allow them to participate in a foreign market without having to exchange their USD into other currencies. This limits the risks that arise from exchange rate fluctuations.

Issuance in the Yankee bond market depends on U.S. interest rates, the strength of the USD and the financial condition of the issuer. Yankee bond issuers prefer to sell Yankee bonds when U.S. interest rates are low to take advantage of lower interest payments, resulting in the cost of raising USD capital becoming cheaper. They also prefer to issue these bonds when the USD is strong so they receive USD at a time when it has great purchasing power.

Some types of bonds have similar characteristics to the Yankee bond. The bulldog bond, for example, is denominated in Great Britain Pound (GBP) and traded in the UK but issued by a non-British bank or corporation. The samurai bond is denominated in Japanese Yen (JPY) and traded in Japan but issued by a non-Japanese bank or corporation.