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Issuing a Foreign Bond

Governments, corporations want to fund their needs at the lowest possible absolute rate. And that is why they tap outside markets and currencies and issue a foreign bond.

What is a Foreign Bond?

The development of the world bond markets allowed bond issuers to bring foreign bond issues in outside of their home markets. For example, since the 1970s, the Canadian provinces have used the U.S. bond market as a major source of funding. The Canadian province of Ontario is one of the world’s largest and most sophisticated non-sovereign borrowers. It brings bond issues in many different currencies and markets, seeking to fund at the lowest possible absolute rate. In the U.S. bond market, Ontario and Hydro One, its power corporation, have many “Yankee” issues and are considered an alternative to domestic U.S. corporate issuers.

The “euromarket” is another major issue source of foreign bonds. European investors will buy the bonds of well known issuers like Ford, Toyota or General Electric or their international subsidiaries, in many different currencies depending on their currency views. This makes for a constant arbitrage between the foreign and domestic bond markets as investors seek to gain the best possible yield employing currency swaps and hedges. A Canadian institutional investor does not really care if the original Ford Credit Canada bond was issued in U.S. funds if he has swapped both the interest and principal payments into Canadian dollars. The large international swap banks like Citibank make markets buying and selling these swaps, which gives investors tremendous liquidity in these transactions. Many European banks often issue in Canadian dollars in the European markets despite eventually requiring funding in their own currencies. They do this to take advantage of demands for Canadian currency issues and to lower their funding costs.

A foreign bond has a vocabulary all their own. Bonds issued in foreign currencies are given the names listed beside the currencies below:

  • “Yankee Bonds” for U.S. dollars;
  • “Samurai Bonds” for Japanese Yen;
  • “Bulldog Bonds” for British pounds; and
  • “Kiwi Bonds” for New Zealand dollars.

Some bonds are hybrids in currency terms, with their coupon and principal payments in different currencies. For example, bonds may have their coupon payments in Yen with their principal amounts in Canadian dollars. This satisfies the needs of Japanese institutional investors for yen income while keeping the eventual return of principal in the national currency of the issuer.

A foreign bond has a much different risk and return profile than domestic bonds. Not only is their price affected by movements in a foreign country’s interest rate, they also change in value depending on the foreign exchange rates. In Canada, for example, the Canadian dollar has moved up to 10% in U.S. dollar terms in very short periods of time. This exchange rate movement would result in price changes of 10% in Canadian dollars which completely overwhelms the coupon income of a bond. Studies have shown that the longer term risk and return characteristics of a foreign bond in domestic currencies are closer to domestic equity returns than domestic fixed income returns.

4 years ago

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