What are Yankee Bonds?
Yankee bonds are bonds issued in the U.S. bond market by a foreign entity, and they are denominated in U.S. dollars. Governments, companies, and other entities issue Yankee bonds.
How Do Yankee Bonds Work?
For example, let's assume Company XYZ is headquartered in Spain. If Company XYZ issues bonds in the United States that are denominated in U.S. dollars, the bonds are Yankee bonds.
Like other bonds, Yankee bonds obligate the borrower to pay a certain interest rate and principal amount according to the terms of the indenture. They must be registered with the SEC before they are issued, and this process can take months.
It is important to note that a Yankee bond is not the same as eurobond.
Why Do Yankee Bonds Matter?
Yankee bonds are advantageous to issuers if they make borrowing cheaper. Yankee bonds also help issuers take advantage of relatively favorable regulatory and lending conditions within the U.S., as well as the U.S.'s very large bond market.
Investors like Yankee bonds because they offer geographic and currency diversification as well as some tax advantages. Investors also get dollar income streams, which they might use to pay other dollar-denominated obligations.
But foreign investors are also subject to risks over and above the standard credit risk and interest rate risk. Exchange rates can change quickly and dramatically, which affects the total return for non-U.S. investors.