Why Do Countries Sell Bonds In Foreign Currencies?
It’s very common for governments or companies to issue bonds in foreign currencies, and there are a few reasons why...
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We have a quick question from Sergiy who says he saw in the terminal that Italy has recently issued US Dollar bonds and wants to know how that is possible? Thanks for the question Sergiy.
It’s actually very common for either governments or companies to issue bonds in foreign currencies. So, taking a look at any bond, the reason why governments and companies issue bonds in the first place is to bring in money, so if a government or company needs funds, one of the ways for them to do that is by selling bonds, which is essentially an IOU with some interest added to it.
But sometimes governments or companies can issue bonds in foreign currencies, and they will do it for various different reasons. Various countries will have different interest rates, and the spread between your own country’s interest rate and that of another can create opportunities for you to lower your funding costs for your bonds, but it’s not only about trying to get lower funding costs, it can also be to create more demand for your bonds.
For example, when a government, and let’s take Italy as per your question, when they want to raise funds, they obviously want to make sure that they can do so at the lowest possible rate or yield, so that they have cheaper debt repayments, because remember they are making debt by selling bonds, and they want to pay back that debt at the cheapest possible rate that they can.
So, even though countries issue foreign bonds to try and diversify their funding sources, it does come with a lot of risk, because they have to deal with risk from two sides, firstly from sudden changes in the foreign country’s rates or yields, and also from changes in the exchange rate.
For example, if the local currency depreciates substantially compared to the foreign bond’s currency, that means the debt will become more and more expensive to pay back and can backfire on them.
So, to put the recent move by Italy to issue bonds in Dollars into perspective for you, for them it wasn’t a way to diversify their risks, for them it was a risky endeavour but they did it for another reason. Think about it this way, even though the Dollar is expected to depreciate further (and that will benefit them in their debt repayments), any sudden shocks that sees Dollar demand coming back will bite them on the repayments.
Apart from that, right now, it’s also much cheaper for them to borrow in Euros than it is in Dollars. So, why then would they want to borrow in Dollars if they do so knowing that they’ll pay more? Well, it comes back to the attractiveness for the bond buyers. Having it denominated in dollars makes it more attractive for investors which means they increase the demand of the bonds and that way make sure they sell more bonds and raise more money.
Another recent example was that of China, they sold euro-denominated bonds in different tranches of 5’s, 10’s and 15-year bonds. But their reason for issuing in Euro’s wasn’t to make the bond more attractive, remember Italy issued in Dollars to make their bonds more attractive but China issued in Euro’s because they want to try and capitalize on the extremely low borrowing costs that Euro-denominated bonds offer them.
Think about it this way, China’s comparable bonds that are denominated in the Yuan is currently sitting between 3.15% and 3.55%, now compare that with the average investment-grade euro bond that is currently tracking below 0.3%. So, for China, it’s a way of raising cheap cash, they are essential borrowing money and paying back much less in their repayments, and because they don’t have the same default risk compared to Italy they usually get oversubscribed for their Euro-denominated issuances.
Some countries can also issue slightly more complicated bonds that pays out the coupon and the principal in different currencies, so they will sell a bond that pays out a higher interest on the coupon that is denominated in one currency but then have the principal in their national currency.
So, Sergiy, I hope that has helped with your question, any others don’t hesitate to let us know.
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If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
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We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
-----
We have a quick question from Sergiy who says he saw in the terminal that Italy has recently issued US Dollar bonds and wants to know how that is possible? Thanks for the question Sergiy.
It’s actually very common for either governments or companies to issue bonds in foreign currencies. So, taking a look at any bond, the reason why governments and companies issue bonds in the first place is to bring in money, so if a government or company needs funds, one of the ways for them to do that is by selling bonds, which is essentially an IOU with some interest added to it.
But sometimes governments or companies can issue bonds in foreign currencies, and they will do it for various different reasons. Various countries will have different interest rates, and the spread between your own country’s interest rate and that of another can create opportunities for you to lower your funding costs for your bonds, but it’s not only about trying to get lower funding costs, it can also be to create more demand for your bonds.
For example, when a government, and let’s take Italy as per your question, when they want to raise funds, they obviously want to make sure that they can do so at the lowest possible rate or yield, so that they have cheaper debt repayments, because remember they are making debt by selling bonds, and they want to pay back that debt at the cheapest possible rate that they can.
So, even though countries issue foreign bonds to try and diversify their funding sources, it does come with a lot of risk, because they have to deal with risk from two sides, firstly from sudden changes in the foreign country’s rates or yields, and also from changes in the exchange rate.
For example, if the local currency depreciates substantially compared to the foreign bond’s currency, that means the debt will become more and more expensive to pay back and can backfire on them.
So, to put the recent move by Italy to issue bonds in Dollars into perspective for you, for them it wasn’t a way to diversify their risks, for them it was a risky endeavour but they did it for another reason. Think about it this way, even though the Dollar is expected to depreciate further (and that will benefit them in their debt repayments), any sudden shocks that sees Dollar demand coming back will bite them on the repayments.
Apart from that, right now, it’s also much cheaper for them to borrow in Euros than it is in Dollars. So, why then would they want to borrow in Dollars if they do so knowing that they’ll pay more? Well, it comes back to the attractiveness for the bond buyers. Having it denominated in dollars makes it more attractive for investors which means they increase the demand of the bonds and that way make sure they sell more bonds and raise more money.
Another recent example was that of China, they sold euro-denominated bonds in different tranches of 5’s, 10’s and 15-year bonds. But their reason for issuing in Euro’s wasn’t to make the bond more attractive, remember Italy issued in Dollars to make their bonds more attractive but China issued in Euro’s because they want to try and capitalize on the extremely low borrowing costs that Euro-denominated bonds offer them.
Think about it this way, China’s comparable bonds that are denominated in the Yuan is currently sitting between 3.15% and 3.55%, now compare that with the average investment-grade euro bond that is currently tracking below 0.3%. So, for China, it’s a way of raising cheap cash, they are essential borrowing money and paying back much less in their repayments, and because they don’t have the same default risk compared to Italy they usually get oversubscribed for their Euro-denominated issuances.
Some countries can also issue slightly more complicated bonds that pays out the coupon and the principal in different currencies, so they will sell a bond that pays out a higher interest on the coupon that is denominated in one currency but then have the principal in their national currency.
So, Sergiy, I hope that has helped with your question, any others don’t hesitate to let us know.
-----
If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
