Yield spreads on $Eurobonds are significantly less than yield spreads on comparable bonds issued in the U.S. market. This result holds both before and after adjusting for underwriting costs. Investors appear willing to pay a substantial price premium for $Eurobonds relative to U.S. bonds of similar risk. Equally risky securities, denominated in the same currency, trade at different prices in competing markets.
Of the arguments that can be made to explain such differential pricing, the tax argument is the most persuasive. The absence of withholding tax at the source and issuance in bearer form increase the relative value of $Eurobonds for investors who wish to avoid or evade taxes. For a nonresident tax evader, $Eurobonds present advantages similar to those provided by tax-free municipal bonds in the U.S. Just as municipal bond investors accept lower yields than those available on taxable bonds of equal risk, nonresident tax evaders may accept lower yields on effectively tax-free $Eurobonds.
U.S. bond investors require a substantial increase in yield for accepting greater default risk. Investors in $Eurobonds demand only a modest increase in yield for accepting the same incremental default risk. This suggests that $Eurobond investors may evaluate default risk differently from U.S. bond investors.
