Steffen Ullmann
Senior Portfolio Manager – Investment Grade
Reverse Yankees – Euro bonds issued by US companies – started the year strongly, but the interest rate turnaround in Europe has put an abrupt end to the boom. The shrinking interest rate differential is making EUR bonds increasingly unattractive as a source of refinancing – is there now a threat of a lasting market shift?
Reverse Yankees set the tone at the start of the year
In view of the expected transatlantic interest rate divergence at the start of the year, there were many indications of a boom in reverse Yankees – similar to 2014, when the ECB lowered its interest rates while the Fed raised them. The first few months confirmed this trend: Reverse Yankees accounted for around 37% of new issues on the EUR investment grade market and were in high demand from investors. The average oversubscription ratio (cover ratio) was 4.36x compared to 3.69x for European issues (source: Bloomberg, own calculation, 01.01.-07.03.2025)
Rise in interest rates ends the attractive refinancing environment
The sudden rise in yields on German government bonds as a result of the German government’s turnaround in fiscal policy has fundamentally changed this expectation. The previously attractive interest rate differential from a US perspective – of over 2% – has narrowed considerably, meaning that reverse Yankees have largely lost their refinancing advantages in the EUR market, particularly after currency hedging.
Source: Bloomberg, USA 10y (USGG10YR Index) and Germany 10y (GTDEM10Y Govt), own calculation; period: 31.01.2023 to 10.03.2025.
The issue volume is likely to fall significantly in the short term, as EUR bonds are no longer an attractive source of refinancing for US issuers. Whether this is merely a temporary dip or a structural shift in the market depends largely on the further development of interest rates. However, there is currently much to suggest that a longer-term phase of rising Reverse Yankee issues – comparable to 2014 to 2018 – is unlikely.
Source: Bloomberg, Bloomberg Euro AGG Corporate Excl Financials (LECFTREU Index) and own calculation; as at 10.3.2025.
Risks
Price losses due to increases in yields and/or higher risk premiums are possible. A total loss cannot be ruled out either.
Past performance is not an indication of future results, nor can future performance be guaranteed.
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