U.S. Dollar Currency Premium in Corporate Bonds

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 de...

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Bibliographic Details
Main Author: Caramichael, John
Other Authors: Gopinath, Gita, Liao, Gordon
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2021
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
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653 |a Interest rates 
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653 |a International Financial Markets 
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653 |a Bonds 
653 |a Capital and Ownership Structure 
653 |a Goodwill 
653 |a Currencies 
653 |a Financial Institutions and Services: General 
653 |a Macroeconomics 
653 |a Corporate bonds 
653 |a Interest rate parity 
653 |a Financial Risk and Risk Management 
653 |a Financing Policy 
653 |a Investment Decisions 
653 |a Economic & financial crises & disasters 
653 |a Government and the Monetary System 
653 |a Short-term Capital Movements 
653 |a Monetary economics 
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653 |a Economics: General 
653 |a Current Account Adjustment 
653 |a Informal sector; Economics 
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520 |a 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