Yankee Bonds

Definition of Yankee Bonds

The bonds are debt obligation bonds issued by foreign entities, specifically foreign banks or financial institutions. Which are not traded in other countries than the united states bearing the US dollar currency under the governance of the Securities Act, 1933, and the registration of which requires a lot of paperwork along with the credit ratings under the shadow of Moody’s, S&P is called as the Yankee Bonds.

Explanation

The Yankee bonds are issued in the US market, which has the normal principal of the other investments, i.e., the higher the risk, the higher the return will be, and the lower the risk, the lower it will be returned. It became popular in the US market after 2008 when there was a global crisis because, at that time, these were the bonds that provided higher returns compared to other investments with good performance. These bonds are only traded in the US market in US currency.

Example of Yankee bonds

Let’s take one Yankee bond with the below details:

Particulars	Value
Face value	$100
Coupon rate	5%
YTM	3%
Maturity	3 years

If YTM falls to 2% in the above example, the value of the Yankee bonds will rise, and if the YTM rises to 5%, the value of the Yankee bond will decrease. Also, the coupon rate and the YTM are the factors that decide whether the bond will be at a premium or discount. Hence, there is an inverse relationship between the price of the Yankee bond with the YTM.

Risk of Yankee Bonds

The returns of the Yankee bond can be affected if the company’s performance in which the investment is made becomes unfavorable. The performance of the company many times gets affected by the country’s economic conditions and other factors. Hence, the country’s situation can indirectly be a risky factor for the Yankee bond’s value. Also, the investor should have the risk-bearing capacity for investing in Yankee bonds, as these are not risk-free.

Advantages

Some of the significant advantages are mentioned below:

• It provides the opportunity to diversify the portfolios for those investors who hold their investments in different sectors, and their bond issuers are also different entities. Those different entities are not part of the US investing in the US bonds market.
• It can sometimes be available at a lower cost than the other bonds in the market. Again, this provides the benefit of cost efficiency over other bonds.
• It provides the opportunity for the highest liquidity in the US market as they are active traders in the US debt markets compared to other bonds in the market.
• The prices of the Yankee bonds are not dependent on other influencing factors like political changes, economic factors, and other changes that may prevail in the US.
• It offers a more significant yield than the other yields on other investments in American portfolios.
• The Yankee bonds are issued in the US in the US currency itself, i.e., in USD, along with the repayment in the same USD currency, there is protection against the currency risk in the market, or there is minimum currency risk in the market.
• The tenure of the Yankee bonds is longer than the other bonds in the market; hence, they can be available for a more extended period.
• Getting the Yankee bonds registered under SEC involves lots of documentation and stringent and complicated requirements. Once all these are done, the issuer receives access to the US market.
• If purchased for a longer duration, the Yankee bonds can act as a natural hedge in the US market.

Disadvantages

Some of the major disadvantages are as follows:

• The Yankee bonds act on the general principle of the investment, i.e., the higher the risk, the higher the return, and if there is a lower risk, the lower the return. Hence, if the investor wants to earn a higher return from the Yankee bonds, he must have a higher capacity for risk holding; otherwise, he can bear huge losses.
• The returns of the Yankee bond also depend on the company’s performance. If some companies do not have excellent or satisfactory financial performance, they can turn into Junk bonds. The company’s performance is often under the influence of the many unfavorable economics and other changes in the country.
• There can be a scenario of a currency mismatch in foreign companies. Generally, the company’s borrowings are in US currency; however, the companies’ gains and incomes from the investments can be in a currency other than the US. This can result in a loss if there is a depreciation in the company’s earnings currency against the US currency. Hence, the holders of the Yankee bonds have to be risk-takers in terms of currency fluctuations.
• As discussed above, the bond issuer must undergo complicated procedures and documentation to register under the SEC. This involves lots of time and costs in the process of registration.
• The Yankee funds are favored compared to the other American funds; hence, they are sold by the US market when the interest rate is generally lower.

Conclusion

The Yankee bonds were not popular in the US market before 2008, when there was a global crisis. All the investors cannot opt for the Yankee bonds as these bonds are suitable only for those investors who can bear the ability of higher risks. There requires a lot of knowledge, understanding of the local laws, and other information to get the Yankee bonds. It has many advantages and disadvantages, which should be appropriately studied before investing in Yankee bonds.

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