Has the U.S. Bond Market Lost its Edge to the Eurobond Market?

Abstract

The growth of the European financial markets, together with the new, stricter regulations on the US financial markets, has spurred a debate over the competitiveness of the US financial markets. In this paper, we contribute to this debate by investigating the relative competitiveness of the US bond
market over the last 10 years. In the early 1990s, the gross spread in the US bond market were significantly lower than in the Eurobond market. While this spread continued to decline in the US bond market, it declined at an even faster rate in the Eurobond market, to the point of eliminating the wide cost differential that existed between the two markets in the early 1990s. These findings are robust and suggest that the relative costs of bond underwriting declined in the Eurobond market. We also find that US firms are increasingly opting to issue their bonds in the Eurobond market, and that this relocation is partly driven by the decline in the relative gross spreads in
the Eurobond market. This finding adds support to our conclusion that the cost of bond underwriting declined faster in the Eurobond market, reinforcing the view that the US bond market is facing a greater challenge from the Eurobond market.

Keywords: Bonds, gross spreads, credit spreads, Eurobond market, U.S. bond market

JEL Classification: G15, G24, G32