The rise of the reverse Yankee

Fraser Lundie

Yankee bonds, issued in the US by a foreign government or company, have been a mainstay of the US fixed income market for decades. But in recent years, more US companies have been doing the reverse: issuing debt in Europe. As a result, the so-called reverse Yankee market has already reached €330bn and is primed for further growth, driven by proposed changes to US tax law. If the Trump administration’s rumoured end to the taxdeductibility of interest expense on debt becomes reality, it would likely lead to further expansion of the market.

Why? US firms would be incentivised to issue bonds offshore, in much the same way many currently try to book profits overseas, in order to minimise the tax burden on onshore profits. There are also further growth drivers. Firstly, globalisation and currency volatility are compelling many US companies to find new ways of better matching revenue streams with costs. Issuing eurodenominated debt is one way. Also, the US dollar has risen by more than 20% against the euro in the past three years, making European companies attractive takeover targets. Finally, the ECB’s corporate bond QE initiative, combined with Europe being at an earlier stage of the easing cycle, has in some cases made it cheaper for US companies to issue bonds in Europe. What does this mean? Reverse Yankees have many benefits for those with the flexibility to allocate. For example, they have considerably increased the breadth of the European credit universe, particularly for investors unable to allocate to bonds not denominated in euros. More choice means more opportunity to outperform.

The market also provides access to US companies that, in many cases, demonstrate higher credit quality than counterparts in Europe. And it provides an excellent source of diversification. Perhaps the greatest benefit is that the market houses excellent mispriced opportunities.

In some cases, relatively unknown US firms issuing in Europe are compelled to price with an attractive spread. For investors with an in-depth knowledge of US issuers, it represents an excellent opportunity to boost risk-adjusted returns.