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Foreign Bond
A foreign bond is a debt security issued by a foreign company or government in the domestic market of another country, denominated in that country's local currency, and subject to that country's regulations. A Japanese company selling bonds in the United States denominated in U.S. dollars is issuing a foreign bond. These bonds carry traditional nicknames: bonds sold in the United States by foreign issuers are called Yankee bonds, in the United Kingdom they are Bulldog bonds, in Japan they are Samurai bonds, and in Switzerland they are Chocolate bonds.
Why Issuers Choose the Foreign Bond Route
Borrowing in another country's domestic market serves several strategic purposes that cannot be replicated by staying home.
- Access to a larger investor base: U.S. debt markets are the deepest and most liquid in the world. A large German company issuing Yankee bonds reaches pension funds, money managers, and institutional investors that have little exposure to euro-denominated European corporate debt.
- Natural currency hedging: A company that earns significant revenue in U.S. dollars can issue Yankee bonds to create a matching dollar liability, reducing currency risk without needing a cross-currency swap.
- Potentially lower borrowing costs: If the domestic capital market is crowded or expensive, issuing where your name is already recognized by investors can produce better pricing than staying home.
Foreign Bonds vs. Eurobonds
These two categories are frequently confused because both involve borrowing across borders.
| Foreign Bond | Eurobond | |
|---|---|---|
| Where Issued | Domestic market of a single foreign country | International market, simultaneously in multiple countries |
| Currency | Local currency of the host country | Often different from the issuer's home currency |
| Regulation | Subject to host country securities law | Less regulated; governed by international market conventions |
| Example | Japanese firm issuing USD bonds in the U.S. market | U.S. firm issuing EUR bonds across European markets simultaneously |
Currency Risk Is the Issuer's Problem to Solve
When you issue bonds in a foreign currency, you take on exchange rate exposure. A Japanese company issuing $500 million in Yankee bonds must repay $500 million plus interest regardless of how the yen-dollar rate moves. If the yen depreciates, repayment becomes more expensive in yen terms.
Issuers typically hedge this exposure using cross-currency swaps that convert the foreign currency debt service back into their home currency. The all-in cost after the swap is what determines whether the foreign bond issuance was genuinely cheaper than a domestic offering.
Sources
- https://www.sifma.org/resources/research/us-bond-market-statistics/
- https://www.sec.gov/cgi-bin/browse-edgar
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