The Foreign Bond Premium

It’s been richer. It’s been cheaper. But it’s always positive. The US domiciled to USD foreign HY bond spread. That is to say: the yield spread of high yield USD bonds issued by foreign (ex-US) companies to high yield cash bonds domiciled in the US is strictly positive.

At times, one is getting more than a 100 basis point pick-up in buying these bonds. At times it is below 50 basis points. Have a look.

So we are talking about a universe of US cash bonds versus a universe of ex-US cash bonds and there will always be some idiosyncratic factors in play where a particular CUSIP will break this rule. But the law of averages and time speaks to its truth. Lots of things could explain this. There is a greater default risk associated with foreign companies outright.There is a “jurisdiction premium” independent of the agreed upon bankruptcy laws and regime to which the bond is subject.There is a recovery value impairment that is baked into the spread.There is a liquidity premium baked into the spread.There is an aversion to foreign bonds on principle, chalked up to a combination of small noisy factors hard to isolate.

Is it irrational, this spread? Not especially so—maybe not at all. The majority of both US and ex-US high yield cash bonds are rated B. This foreign bond premium provides a pick-up compared to B rated bonds in aggregate, but it is nowhere near the yields seen in distressed debt. Even so, it’s

not like a foreign company with the muscle to float a bond issue is substantially less sophisticated than a same-rated US competitor.

Regardless of the explanation (or lack of it) it is something that bears watching, yo.


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