U.S. Dollar Currency Premium in Corporate Bonds

IMF Working Papers, July 12, 2021

Source details

The study isolates a U.S. dollar currency premium by comparing corporate bonds issued in the dollar and the euro by firms outside the U.S. and euro area.
While the dollar dominates global debt issuance, borrowing costs in the dollar are more expensive without a currency hedge and about the same with a currency hedge when compared to the euro.
The observed parity in currency-hedged corporate borrowing contrasts with the persistent deviation from covered interest parity in risk-free rates.
A dollar safety premium is observed in relative hedged borrowing costs for the subset of bonds with high credit ratings and short maturities—attributes similar to those of safe sovereigns.
Firms flexibly adjust the currency mix of their debt issuance depending on the relative borrowing cost between dollar and euro debt.
The disproportionate demand for U.S. dollar debt is reflected in higher issuance volumes that drive up the currency-hedged dollar borrowing costs such that at the margin they equate to euro borrowing costs.

Subject: Bond yields, Bonds, Corporate bonds, Currencies, Financial institutions, Financial services, Interest rate parity, Money
Keywords: Bond yields, Bonds, Corporate bonds, Covered Interest Rate Parity Deviation, Currencies, currency hedge, currency mix, euro borrowing costs, Exchange Rate, Exorbitant Privilege, Global, Global Corporate Debt, Interest rate parity, premium in corporate bonds, U.S. Dollar currency premium, U.S. Dollar dominance, U.S. Dollar Dominance

IMF Working Paper — "U.S. Dollar Currency Premium in Corporate Bonds", July 12, 2021.