Foreign-law bonds: Can they reduce sovereign borrowing costs?

Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-a-vis domestic bonds. This paper studies the effect of this jurisdiction choice on bond prices. We test whether foreign-law bonds trade at a premium compared to domestic-law bonds. We use the euro area 2006-2013 as a unique testing ground, controlling for currency risk, liquidity risk, and term structure. Foreign-law bonds indeed carry significantly lower yields in distress periods, and this effect rises as the risk of a sovereign default increases. These results indicate that, in times of crisis, governments can borrow at lower rates under foreign law. (C) 2018 International Monetary Fund. Published by Elsevier B.V. All rights reserved.