Why issue bonds offshore?
AbstractThis paper asks why Asia-Pacific residents issue debt in offshore markets and considers the implications for domestic debt markets. We use unit record data for bond issuance by non-government residents of Australia, Hong Kong, Korea, Japan and Singapore to link the decision to issue offshore to potential benefits. The results suggest that residents of smaller markets issue bonds offshore to arbitrage price differentials; to access foreign investors; and to issue larger, lower-rated or longer-maturity bonds. These bond characteristics tend to be correlated with offshore bond market size. The results support the notions that (i) deviations from covered interest parity are actively arbitraged by residents of minor currency areas, as well as by internationally active borrowers, as established in the literature; and (ii) issuers benefit from the liquidity and diversification of larger "complete" offshore markets. Against the potential benefits to borrowers, we consider the risks for both borrowers and the domestic market, and lessons from the ongoing financial crisis such as the benefits of funding diversification.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 334.
Length: 55 pages
Date of creation: Dec 2010
Date of revision:
offshore bonds; interest rate parity; local currency debt;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-18 (All new papers)
- NEP-FMK-2010-12-18 (Financial Markets)
- NEP-IFN-2010-12-18 (International Finance)
- NEP-SEA-2010-12-18 (South East Asia)
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