U.S. Dollar Currency Premium in Corporate Bonds

By John Caramichael, Gita Gopinath, Gordon Y. Liao

July 12, 2021

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John Caramichael, Gita Gopinath, and Gordon Y. Liao U.S. Dollar Currency Premium in Corporate Bonds, (USA: International Monetary Fund, 2021) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We isolate a U.S. dollar currency premium by comparing corporate bonds issued in the dollar and the euro by firms o utside t he U .S. a nd e uro a rea. We make s everal empirical observations that dissect the perceived advantage of borrowing in the dollar. First, 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. This observed parity in currency-hedged corporate borrowing stands in contrast to the persistent deviation from covered interest parity in risk-free rates. Second, we observe a dollar safety premium in relative hedged borrowing costs, found in the subset of bonds with high credit ratings and short maturities, attributes similar to those of safe sovereigns. Finally, we find that firms flexibly adjust the currency mix of their debt issuance depending on the relative borrowing cost between dollar and euro debt. In sum, 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

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/185
Stock No:

WPIEA2021185
ISBN:

9781513579016
ISSN:

1018-5941

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