What are Eurobonds?
The Eurobond market is one of the largest debt markets in the world. It comprises a large portion of the debt which is issued by multinational companies as well as governments. It is therefore important for any student of fixed income securities to be aware of what Eurobonds are.
The fact that these bonds are called “Euro bonds” can be quite confusing to many investors. This is because a lot of these bonds are not necessarily originate in Europe, by European countries. Most of these bonds are not even denominated in the currency Euro. However, for many years, these bonds have been called Eurobonds. As a result, they are now referred to by that name even though governments of the European Union are planning to change that in the near future.
In this article, we will have a closer look at what the Eurobond market is and how it works.
What is the Eurobond Market?
In order to understand the Eurobond market, we first need to understand what a domestic bond issue, as well as a foreign bond issue, is.
- Domestic bonds issues are bonds that are sold by companies that operate in the same country where they are selling to investors. Also, these bonds are denominated in the home currency. For example, if an American company sells bonds to American investors in order to raise United States dollars, then the market is called a domestic market.
- Foreign bonds are the opposite of domestic bonds. This means that in this case companies venture to a country that is different as compared to the country of their origin. These companies try to tap the investors in the foreign country and hence the bonds are issued in a foreign currency. For instance, if an American company sells bonds in the Japanese Yen to investors in Japan, then such a bond issue is said to have taken place in the foreign market.
- Eurobonds are a type of bond issue wherein the issuer taps the currency which is not in its home market. For instance, United States dollars are typically supposed to be in the United States. However, there are some dollars that are sitting in accounts outside the United States.
When the issuer taps such funds, they are said to be dealing in the Euromarkets. Hence, Eurobonds are issued by a foreign company, in a different country and are denominated in a third currency! An example would be a British company borrowing United States dollars in the Amsterdam markets. Notice that the issuer, the investor, and the country are all different.
Why do Eurobonds Exist?
Now that we are aware of what Eurobonds are, the next question is about why do such bonds exist? Some of the benefits of issuing these bonds have been explained below:
- Cheaper Funds: The main reason behind the popularity of Eurobonds is that it allows issuers to raise funds in a country with a lower interest rate. It could also mean that companies get access to funds from markets where the compliance and regulation costs are lower.
- Newer Markets: Eurobonds may also be useful for companies when they want to tap newer markets. For example, if an American company has already issued a lot of debt in America, it may want to tap newer markets and a different class of investors. The Eurobonds markets allow companies to diversify their list of investors and tap newer markets.
- Fund International Investments: Eurobonds are very useful for companies that are looking to invest in international markets. For example, if an American company wants to expand its business in China, then it may need investment in the Chinese Yuan. In such cases, they can borrow in the Chinese Yuan. This will help them avoid transaction charges as well as currency spreads. Also, they can pay the interest rate which is compatible with the currency in which they are borrowing.
- Avoiding Currency Risks: Lastly, it is also important to note that what issuers tap the Eurobond market, they end up completely avoiding the currency risks. This is because they borrow in the same currency in which they have to make their business transactions. Given the fact that a number of companies are expanding their global operations due to globalization, the market for Eurobonds is likely to expand greatly in the near future.
- Benefits to Investors: From an investor’s point of view also, Eurobonds tend to be quite beneficial. They are cheap and have an extremely liquid market.
The fact of the matter is that Eurobonds are an extremely large and liquid type of debt market. Almost every major country, as well as corporation around the world, has some exposure to the Eurobond market.
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