By Frances Coppola
Reverse Yankee bonds, which are bonds issued in foreign currencies by U.S. companies outside the U.S.—but under U.S. law—are becoming an increasingly popular way for some U.S. businesses to raise funds. And, as noted in a March 2019 Fortune article, reverse Yankee bonds are quite popular in Europe, where very low interest rates and the strong dollar exchange rate have encouraged U.S. companies to issue growing volumes of euro-denominated bonds.1
Reverse Yankees are a type of “eurobond”—a name that does not, in fact, refer to the euro currency but rather to any bond issued in a foreign currency outside the offering company’s home market.2 But although companies have been issuing various types of eurobonds for decades, reverse Yankees are largely a 21st-century phenomenon. Euro-denominated reverse Yankee issuance was almost zero in the year 2000, but by 2006 it had risen to 40 billion euros.3 It dropped back during the financial crisis, but then rose sharply from 2012 onwards and reached 330 billion euros by 2017.4
Analysts think that this enormous increase in reverse Yankee issuance is largely driven by divergent European and U.S. monetary policy. The European Central Bank (ECB) has maintained very low interest rates while the U.S. has been raising rates. This has encouraged U.S. companies to issue debt denominated in euros. Additionally, the euro’s weak exchange rate versus the U.S. dollar helps make European companies attractive takeover targets for U.S. companies with active FX risk management strategies.
Since the 2011-13 Eurozone crisis, inflation and growth in the Eurozone have remained low, while the U.S. has been growing strongly, although inflation has not returned to target. In 2014-5, when the commodities boom came to an end, the Eurozone’s inflation rate slipped below zero, causing the ECB to respond by cutting its interest rate on deposits into negative territory and embarking on a Quantitative Easing (QE) program. Simultaneously, the U.S. Federal Reserve ended its own QE program and announced the start of interest rate rises. As the dollar’s exchange rate rose, companies ramped up reverse Yankee bond issuance to take advantage of Europe’s cheap funding rates.
Although reverse Yankee issuance dipped during 2018,5 toward the end of that year multinational corporations started issuing substantial amounts of euro-denominated debt, and by March 2019 the reverse Yankee market had rebounded.6
The reasons for the rebound are unclear. The ECB has now ended its QE program, but its “lower for longer” signals may have given companies confidence that interest rates will not rise any time soon. A Wall Street Journal article suggests that the main reasons for the rebound are lower hedging costs and the U.S. tax reforms, which encouraged companies to repatriate overseas income thus increasing the need for debt to fund foreign operations.7 In addition, the Fed has now stopped raising interest rates, so it may also be that companies are taking advantage of reverse Yankees while they can, anticipating the end of such funding opportunities should monetary policy become less divergent.
As the Wall Street Journal article says, some of the euro-denominated debt issued by U.S. companies since the Eurozone crisis was undoubtedly used to fund investments and activities in Europe. However, a significant proportion seems to have been used to fund dollar-denominated investments in the U.S., as well as other countries’ trade with the U.S.
The economic principle of “covered-interest parity” says that companies should be unable to obtain funding more cheaply by borrowing in foreign currency then exchanging it for their home currency in FX or swap markets. If markets are functioning as they should, arbitrage should wipe out any cost saving from funding in foreign currency. But in recent years, a persistent “cross-currency basis” spread has made it advantageous for U.S. companies to fund themselves in euros and swap into U.S. dollars.
According to the Bank for International Settlements (BIS), divergent monetary policy between the U.S. and the Eurozone is partly responsible for this apparent failure of covered interest parity. But it is also because tighter regulation of banks since the 2008 financial crisis has made arbitrage more expensive, resulting in inefficient pricing of spot and forward FX rates, BIS has said.8
In 2018, the cross-currency basis spread shrank, apparently due to higher hedging costs arising from European tax reforms intended to discourage profit shifting to tax havens. This may have contributed to reduced reverse Yankee issuance in 2018.9 Analysts expected this tightening to be short-term, and indeed hedging costs have now reduced and the market has rebounded.
Although the Fed has stopped raising interest rates, monetary policy between the U.S. and Europe is still divergent, and the dollar’s exchange rate is still strong. While this remains the case, many businesses may wish to take advantage of the cheap funding opportunities created by divergent monetary policy and exemplified by reverse Yankee bonds. An active FX risk management strategy can help businesses to manage increased FX risk arising from funding activities in foreign currency.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
1. “U.S. companies are going after EU bond market investors,” Fortune; http://fortune.com/2019/03/20/europe-bond-market/
2. “Eurobond,” Investopedia; https://www.investopedia.com/terms/e/eurobond.asp
3. “’Reverse Yankees’: a home run for U.S. issuers?” M&G Investments; https://www.mandg.com/-/media/Literature/UK/Institutional/Reverse-Yankee-UK.pdf
4. “What is a Reverse Yankee bond?” Morningstar; http://www.morningstar.co.uk/uk/news/156491/what-is-a-reverse-yankee-bond.aspx
5. “Reverse Yankee bond sales shrivel as U.S. firms take home dollars,” Reuters; https://www.reuters.com/article/us-bonds-yankees-issuance-analysis/reverse-yankee-bond-sales-shrivel-as-us-firms-take-home-dollars-idUSKBN1K91ZP
6. “Coca Cola To Issue Bonds Amid European Market Frenzy,” Bloomberg; https://www.bloomberg.com/opinion/articles/2019-02-25/coca-cola-to-issue-bonds-amid-european-market-frenzy
7. “U.S. Companies Cross The Atlantic For Bond Love,” Wall Street Journal; https://www.wsj.com/articles/u-s-companies-cross-the-atlantic-for-bond-love-11553079601
8. “Covered Interest Parity Lost: Understanding the Cross Currency Basis,” Bank for International Settlements; https://www.bis.org/publ/qtrpdf/r_qt1609e.htm
9. “Global Money Notes #12: BEAT, FRA-OIS and the Cross Currency Basis,” Credit Suisse; https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&sourceid=emcsplus&document_id=1080311991&serialid=VQ94WpCF8lRFqPEpnnsWG4ekPvyqMRZpd%2FTDGLHjDRI%3D
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