How Are Eurobonds and U.S. Government Bonds Similar?
U.S. government bonds are Treasury bonds, also called Treasuries; Agency bonds, a.k.a. Agencies, issued by certain agencies of the U.S. federal government; and the popular Savings Bonds Series EE and I. All three carry the full faith and credit of the United States government. Eurobonds are bonds issued exclusively in a European country's bond market and denominated in a currency other than that country's. For example, if General Motors issues bonds in Europe, payable in dollars, they are dollar Eurobonds; if payable in Yen, they are Yen Eurobonds. While U.S. government bonds and Eurobonds share basic bond characteristics, they also differ in important aspects, such as liquidity, risk and form of ownership.
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Basic Characteristics
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U.S. government bonds and Eurobonds are similar in that both are debt instruments payable at maturity whose par or face value is tailored to the issuer's and investors' needs. U.S. government bonds are issued only in U.S. dollars, while Eurobonds can be issued in any of the major trading currencies, including the dollar. The relative risks of the two types of bonds differ significantly. Eurobonds issued by multinationals, corporations or banks carry higher risk than U.S. government bonds, which are the world benchmark for financial instrument safety.
Issuers
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U.S. Treasuries and U.S. Savings Bonds are issued by the U.S. Treasury, while Agencies are issued by certain U.S. government agencies, the Small Business Administration, for example, through the Federal Home Loan Bank or other federal financing institutions. Eurobond issuers include supranational entities, like the World Bank, as well as multinational enterprises, private corporations and banks.
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Investors
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Individual and institutional investors both can invest in U.S. government bonds and Eurobonds. The distribution methods for the two types differ, however. The U.S Treasury auctions or sells Treasuries and Savings Bonds to investors directly, while Eurobonds are underwritten by and issued through investment banks. Individual investors must obtain them from brokers. The latter holds true for U.S. agency issues as well. Savings Bonds may also be bought through commercial banks and with payroll deductions.
Most U.S. government bonds exist only as electronic entries in the owner's name on the U.S. Treasury's or other issuing institution's books. The only exception is the Savings Bond, which is still available in paper form.
The Eurobond is exclusively issued in paper form. It is an unregistered bearer instrument, meaning that, to own a Eurobond, you must have physical possession of it. Neither the issuer nor the bond underwriters keep records of a Eurobond's current ownership.
Term
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Both U.S. government and Eurobonds are issued for a fixed term or number of years that varies from short term to as long as 30 years, as in the case of U.S. Treasuries, or longer. The principal face amount of bonds is payable at maturity.
Pricing
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Both types of bonds are priced at current market interest rates or "coupons" commensurate with the bond's term, but Eurobonds tack on an additional "spread" to account for the issuer's credit quality. After issuance, market prices of Treasuries, Agencies and Eurobonds vary inversely with the current interest rate. Prices are quoted as a discount or premium on 100 currency units, such as $100 or €100. A key difference is that, because U.S. Government bonds are judged to be the safest investment, they carry a lower interest rate than Eurobonds. Eurobonds are priced off LIBOR, EURIBOR or the U.S. Treasury Bond Market Yield curve.
Liquidity
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U.S. Government Treasuries and Agencies, but not U.S. Savings Bonds, trade on well-established secondary markets once they have been issued. Eurobonds are less liquid, the market makers being largely wholesale, institutional investors who may not trade all bond issues frequently, holding them in portfolio instead.
Structure
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Conventional, or straight, Eurobonds come with a fixed interest coupon and a final maturity date, same as for U.S Treasuries and Savings Bonds. But the interest on the Eurobond is usually paid annually, while Treasuries and Agencies pay semi-annually. Eurobonds may also be issued as Floating Rate Notes (FRN), zero-coupon bonds, convertible bonds and high-yield bonds. Most U.S. agency bonds are also straight, non-callable or bullet bonds but may be issued as floating-rate, no-coupon or callable instruments. U.S. Savings Bonds are an accrual-type security, which means interest is added to the bond monthly and paid when the investor cashes in the bond.
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