NBER Digest | Sept 2018
Many investors avoid currency risk when buying debt issued by borrowers in foreign countries, but the U.S. dollar’s international status makes dollar-denominated debt an easier sell.
Almost all owners of foreign bonds hold that debt in their own currencies, rather than in the currency of the nation where the debt was issued. This home currency bias is so strong that, if one knows the currency in which a bond is issued, it is possible to make a very good guess about the nationality of its owner without knowing the nationality of the debt issuer, according to findings in International Currencies and Capital Allocation (NBER Working Paper No. 24673).
The only country for which this pattern does not hold is the United States, because the dollar is an international currency. Foreign debtholders are willing to hold U.S. debt issued in U.S. dollars, and this pattern has grown stronger in the last decade. This willingness of foreign investors to hold dollar-denominated bonds means that many U.S. companies can tap foreign markets to borrow more easily than firms in many other countries.