Pricing Sovereign Debt: Foreign versus Local Parameters

Abstract

A sovereign seeking to raise funds in the bond market may choose to issue the debt under either local or foreign parameters. This decision involves a tradeoff between the sovereign retaining discretion in managing the issue on the one hand and relinquishing control of the issue to third parties on the other. Examining three key bond parameters—governing law, currency, and stock exchange listing—we find that, with few exceptions, investors consider foreign-parameter debt to be less risky than comparable local-parameter debt of the same sovereign. Starting with a sample of 22,605 issuances by 111 sovereigns from 1990 through 2016, we identify a set of 33 sovereigns that have issued foreign- and local-parameter bonds that can be closely matched by issue date and tenor. With the exception of six countries in this set, we find that both investment grade and non-investment grade sovereigns are able to issue their foreign-parameter debt at lower yields relative to their local-parameter debt.

Keywords: Contracts, Pricing, Bonds, Sovereign Debt, Efficient Markets

JEL Classification: F33, F34, G15, K12