Eurobond

The immediate catalyst for the Eurobond market's creation was the Interest Equalization Tax imposed by the United States government in July 1963, which levied a tax of up to fifteen percent on American purchases of foreign securities to curb capital outflows and protect the United States balance of payments. 

The IET made it prohibitively expensive for foreign borrowers to raise dollar-denominated capital in the United States domestic market. London, then as now a highly accommodating international financial centre, offered dollar-denominated bond issuance outside the United States regulatory and tax framework, allowing issuers to reach dollar investors globally without triggering the IET. 

The Eurobond market was therefore born specifically as a regulatory arbitrage structure — offshore issuance designed to circumvent a domestic tax — and that regulatory-avoidance characteristic remained a defining feature of the market for decades.

The broader Eurodollar market from which the Eurobond market emerged had itself originated even earlier in the 1950s, when Soviet bloc countries accumulated dollar reserves and chose to hold them in European banks rather than in the United States, where they feared seizure in the Cold War political environment. These offshore dollar deposits — Eurodollars — established the infrastructure and investor appetite for dollar-denominated transactions outside United States jurisdiction that the Eurobond market subsequently exploited.

The Three Defining Structural Characteristics

As confirmed by multiple authoritative sources including the Wikipedia entry on Eurobonds, ScienceDirect's financial reference on Eurobond markets, and the World Bank's guidance note on international bond issuance, three structural characteristics define a Eurobond and distinguish it from both domestic bonds and foreign bonds.

The first is currency-country mismatch. The bond is denominated in a currency that is not the domestic currency of the country in which it is issued. A dollar bond issued in London is a Eurodollar bond. A sterling bond issued in Switzerland is a Eurosterling bond. 

A yen bond issued in the United States is a Euroyen bond. Without the currency-country mismatch, the instrument is simply a domestic bond.

The second is international syndication. The underwriting and distribution of the issue are managed by an international syndicate of investment banks drawn from multiple countries, simultaneously placing the bonds with institutional investors across multiple jurisdictions. No single domestic syndicate handles a Eurobond — the defining feature of the distribution process is its multinational character. A typical Eurobond syndicate involves a lead manager or joint lead managers who structure the transaction, a group of co-managers who assist in underwriting the risk and marketing the bonds, and a broader selling group of dealers who place bonds with their respective investor bases across different regions.

The third is offshore settlement through international clearing systems. Eurobonds settle through Euroclear, headquartered in Brussels, or Clearstream, formerly called Cedel and headquartered in Luxembourg. These international central securities depositories hold Eurobond positions in electronic book-entry form on behalf of participating institutions and process ownership transfers, coupon distributions, and principal repayments across borders. The standard Eurobond settlement cycle on European trading venues is currently T-plus-two, with the European Securities and Markets Authority publishing a roadmap to shorten this to T-plus-one by October 11, 2027.

The Eurobond Versus the Foreign Bond — A Critical Distinction

The examination curriculum requires precision in distinguishing Eurobonds from foreign bonds — two categories of international bond that are frequently confused because both involve cross-border issuance.

A foreign bond is issued by a foreign borrower in a domestic market, denominated in the currency of that domestic market, and subject to the domestic regulations and registration requirements of that market. Foreign bonds have specific colloquial names by market: a Yankee bond is a dollar-denominated bond issued by a non-United States borrower in the United States domestic market, registered with the SEC and settling through the domestic Depository Trust Company system. A Samurai bond is a yen-denominated bond issued by a non-Japanese borrower in Japan. A Bulldog bond is a sterling-denominated bond issued by a non-British borrower in the United Kingdom. A Kangaroo bond is an Australian dollar-denominated bond issued by a non-Australian borrower in Australia. In each case, the currency of denomination matches the currency of the domestic market in which the bond is issued — there is no currency-country mismatch — and the bond is subject to that market's domestic regulations.

A Eurobond, by contrast, is denominated in a currency that does not match the domestic currency of the country in which it is issued, is distributed internationally rather than in a single domestic market, and settles offshore through Euroclear or Clearstream rather than through any national domestic clearing system. The regulatory framework governing the issuance is international rather than the domestic law of any single jurisdiction.

A global bond occupies a hybrid position — it is issued simultaneously in the Eurobond market and in one or more domestic markets, satisfying the disclosure requirements of each relevant domestic market as well as international market conventions. The World Bank and major sovereign issuers frequently use global bond structures to reach the broadest possible investor base across both the international market and specific domestic markets including the United States.

Regulation and the Securities Act Exemption

Eurobonds issued outside the United States are not required to be registered with the SEC under the Securities Act of 1933, because the registration requirement applies to securities offered or sold in the United States and the Eurobond structure is specifically designed to exclude United States investors from the offering. 

The offshore offering exemption is codified in Regulation S under the Securities Act, which provides a safe harbour for offers and sales occurring outside the United States to non-United States persons, subject to specified offering restrictions and distribution compliance periods.

Under Regulation S, Eurobond issuers must implement procedures to prevent the bonds from flowing back into the United States during a restricted period — typically forty days for investment grade issuers — following initial issuance. These selling restrictions are reflected in the offering documentation and are enforced through the clearing systems, which flag restricted securities during the applicable compliance period.

Many Eurobond issuers simultaneously structure a Rule 144A tranche of their offering that can be placed with United States qualified institutional buyers — institutions managing at least one hundred million dollars in securities. A Eurobond with a Rule 144A clause, as described in the World Bank's international bond issuance guidance note, allows the issuer to access United States institutional capital alongside international investors while maintaining the offshore structure of the primary Eurobond offering. The Rule 144A tranche settles through the domestic DTC system while the Eurobond tranche settles through Euroclear or Clearstream.

The Tax Equity and Fiscal Responsibility Act of 1982 effectively ended bearer bond issuance for United States domestic purposes, and the Hiring Incentives to Restore Employment Act of 2010 eliminated the TEFRA D exception that had previously permitted United States issuers to issue foreign-targeted bearer Eurobonds. Since March 2012, United States issuers can no longer issue bearer form Eurobonds — all their international bonds must be in registered form. Non-United States issuers continue to issue Eurobonds in forms treated as effectively registered because ownership is transferred exclusively through the book-entry records of Euroclear and Clearstream rather than by physical delivery, satisfying the IRS definition of registered form under Notice 2012-20.

The Issuance Process

The Eurobond issuance process is fast by the standards of securities markets, with investment grade issuers able to complete a transaction from mandate to pricing within twenty-four to forty-eight hours. This speed reflects the absence of domestic registration requirements that impose disclosure preparation and SEC review periods on domestic United States bond offerings.

The process begins with the issuer selecting lead managers — typically one to three major international investment banks — through a request for proposal or relationship-based mandate process. The lead managers negotiate the terms of the offering, prepare the offering circular — the Eurobond equivalent of a prospectus, subject to international disclosure standards rather than SEC requirements — and conduct a roadshow presenting the transaction to institutional investors across multiple financial centres simultaneously.

Book building determines investor demand at various yield levels. When the order book is sufficiently oversubscribed, the lead managers price the bonds — setting the coupon rate and issue price — and allocate bonds to investors. Underwriting fees, called the gross spread, compensate the syndicate for distribution risk and marketing effort, and typically range from approximately fifteen to seventy-five basis points of the issue size for investment grade corporate issuers, declining as issue size and issuer credit quality improve.

The bonds are then listed on a recognised exchange — most commonly the Luxembourg Stock Exchange or the London Stock Exchange — primarily to satisfy the listing requirements of institutional investors whose mandates require exchange-listed instruments, rather than because active exchange trading occurs. Secondary trading in Eurobonds is overwhelmingly over the counter through the dealer network, not on the listing exchange.

Major Eurobond Issuers and the Market Today

Major issuers of Eurobonds include multinational corporations seeking to access dollar or euro capital from the global investor base, sovereign governments — particularly emerging market governments that cannot satisfy domestic borrowing needs from local capital markets — supranational organisations including the World Bank, the European Investment Bank, and the Asian Development Bank, and financial institutions managing regulatory capital and funding requirements across multiple currencies and jurisdictions.

The United States dollar remains the dominant currency of Eurobond denomination, reflecting the dollar's status as the world's primary reserve currency and the depth of global dollar-denominated investor demand from central banks, sovereign wealth funds, and institutional investors across Asia, the Middle East, and Europe. The euro, British pound, and Japanese yen account for substantial additional issuance volume. Emerging market sovereigns including those in Africa frequently issue Eurodollar bonds to attract foreign capital — Ivory Coast, Benin, and Kenya each successfully issued Eurobonds in 2024 to fund government spending and infrastructure investment.

Examination Relevance and Key Takeaways

Eurobonds are tested on the Series 65 and Institutional Series examinations in the context of international fixed income markets, the distinction between Eurobonds and foreign bonds, regulatory exemptions from Securities Act registration, and the role of international clearing systems.

The core points to retain are these: a Eurobond is a bond denominated in a currency other than that of the country in which it is issued, distributed through an international underwriting syndicate and settled through Euroclear or Clearstream rather than any domestic clearing system; the Euro prefix refers to the offshore nature of the issuance, not to the euro currency or to Europe — a Eurodollar bond is dollar-denominated and issued outside the United States, a Euroyen bond is yen-denominated and issued outside Japan; the first Eurobond was issued by Autostrade in July 1963, arranged by S.G. Warburg in London, as a direct response to the United States Interest Equalization Tax that made domestic dollar borrowing prohibitively expensive for foreign issuers; a foreign bond differs from a Eurobond in that it is issued in a domestic market in that market's domestic currency and subject to domestic regulations — Yankee bonds are dollar bonds issued by foreign borrowers in the United States, Samurai bonds are yen bonds issued by foreign borrowers in Japan, and Bulldog bonds are sterling bonds issued by foreign borrowers in the United Kingdom; Eurobonds are exempt from Securities Act registration under Regulation S provided they are sold exclusively to non-United States persons outside the United States during the applicable compliance period, with many issuers simultaneously including a Rule 144A tranche placeable with United States qualified institutional buyers; since March 2012 following the HIRE Act, United States issuers can no longer issue bearer form Eurobonds; and secondary trading is conducted over the counter through the international dealer network with settlement through Euroclear in Brussels or Clearstream in Luxembourg at T-plus-two on European venues under current settlement standards.