Foreign Discount in International Corporate Bonds

In the dollar-denominated corporate bond market, 42% of bonds with an amount outstanding of USD 5.9 Trillion are issued by non-US firms. Despite the increasing importance of cross-border financing, foreign issuers are paying an extra premium of 22 bps, compared with their US counterparts. A similar foreign discount exists in the euro-denominated corporate bond and dollar-denominated sovereign bond market. While the standard risk measures can not explain the discount, I propose a theoretical explanation based on uncertainty aversion. Empirically, I find that the majority of the discount can be explained away by the Economic Policy Uncertainty (EPU) index from Baker, Bloom, and Davis (2016). Taking COVID-19 as an event study, I further document a foreign squeeze effect by showing that foreign dollar bonds suffer higher selling pressure than US dollar bonds during market turmoil. Such foreign discount (USA effect) dominates the dollar safety premium (USD effect). My results highlight the foreign discount and foreign squeeze effects in international corporate bonds.