Beyond the Carry Trade: New Perspectives on Latin American Firms' Use of Foreign-Currency-Denominated Bond Issuance, 2000–2022

Corporate bond issuance from emerging economies has been the main driver of the expansion of global debt following the 2008 global financial crisis. Although Asian countries have accounted for the largest volume of issuance, Latin American firms have been the most dynamic, making the region the one with the fastest growth in these issuances. This article studies the underlying motivations that lead non-financial firms in Latin America to raise debt through bond issuance. Traditionally, the most widely accepted narrative in the literature has emphasized carry trade operations as the predominant motive for the use of proceeds from foreign-currency-denominated bond issuance. Adopting an innovative methodological approach, this paper challenges the set of ideas associated with that hypothesis. In this regard, we make two contributions: one methodological and one analytical. First, rather than examining ex ante incentives based on global interest rate differentials, as previous literature has done, we use ex post interest income recorded in firm-level balance sheets. Following this methodology, we find no evidence supporting the existence of carry trade practices following bond issuances. On the contrary, we observe a strong relationship between bond issuance and capital expenditure, which casts doubt on the notion that speculative motives lie behind these issuances. Second, as an analytical contribution, we examine the alternative use of funds to manage firms’ liabilities. The results suggest that Latin American firms have taken advantage of loose international monetary conditions to reduce short-term debt and extend debt maturities, while also strategically increasing cash holdings on their balance sheets as a safeguard against potential changes in the global environment.