A bulldog bond is a foreign bond traded in the UK, where the British Bulldog is a national icon, hence the name. The UK, London specifically, remains the global financial center and is home to world-class support infrastructure. We will define the bulldog bond meaning, outline the opportunities, and note the risks associated with a bulldog bond.
Bulldog Bonds in Finance
The British Pound is the world’s oldest currency, the fourth most traded one, and the fourth reserve currency. Therefore, with the dominant standing of London in the global financial market, the UK remains the top destination for international capital flows. It makes bulldog bonds one of the most sought-after securities to raise capital, diversify portfolios, reduce borrowing costs, and gain exposure to cross-currency trading instruments.
A bulldog bong gives foreign investors outside the UK an opportunity to transact in British Pound-denominated securities, creating a local market on an international level. The UK remains the primary market for bulldog bonds due to the liquidity and availability of the British Pound. The Eurobond, a bond issued in Euros, is often listed on numerous exchanges globally, given the status of the Euro as the number two traded currency and reserve currency, trailing only the US Dollar. The most significant difference is that the US prints twin deficits and the Eurozone twin surpluses.
Other notable foreign bonds include:
The Australian kangaroo bond
The Japanese samurai bond
The Canadian maple bond
The Spanish matador bond
The Dutch Rembrandt bond
A Bulldog Bond Explained
Non-UK companies who want to raise capital in British Pounds, traded in the UK, can issue a bulldog bond. For example, a German company that seeks to raise money can issue a bulldog bond in London and raise financing in the UK from investors, especially if it will achieve favorable terms versus conditions in its home market.
Why would a company tap the foreign market rather than its domestic one?
It is not uncommon for companies to raise necessary financing in the foreign bond market. With the UK a dominant player in international finance, bulldog bonds provide a unique opportunity but are not risk-free.
Here are some reasons why a company would raise a bulldog bond:
It can access lower interest rates and decrease borrowing costs
It needs British Pounds
Access to capital markets outside their domestic one
A stable financial system and currency compared to their home market
Trust and reliability of the UK financial system and its dominant position globally
Reduce currency exchange risks
Meet company and investor demand for diversification
Characteristics of a Bulldog Bond
Since bulldog bonds in finance are popular, and before investors seek to add them to their bond portfolios or traders aim to benefit from price fluctuations, it is paramount to understand the characteristics of a bulldog bond.
What are the bulldog bond characteristics?
British banks, either one bank or a group of banks, underwrite a bulldog bond
The British Pound is the denomination of a bulldog bond
The UK market is where a bulldog bond trades
Companies raise a bulldog bond when interest rates are lower than their domestic market or alternatives with lower stability and reliability, for example, Canadian and British interest rates may be equal, but the size of the Canadian market and availability of Canadian Dollars are notable smaller
A bulldog bond offers international diversification, for example, Indian traders can buy bulldog bonds if they accept the currency risk
The Popularity of a Bulldog Bond
Bulldog bonds are popular because the British Pound is the fourth most liquid currency, trailing the US Dollar, the Euro, and the Japanese Yen. Adding to the appeal of bulldog bonds is the reliability and stability of the UK market, the global financial center, making a bulldog bond less risky than many alternatives. A bulldog bond offers non-UK companies a low-risk British Pound marketplace, supporting growth as it has historically done for countries like Australia, India, and Hong Kong.
The Opportunities and Risks of a Bulldog Bond
Understanding the opportunities and risks associated with a bulldog bond is necessary before adding a bulldog bond to your portfolio.
The opportunities of a bulldog bond:
Access to financing
Lower borrowing costs if UK interest rates are low
Stable currency in a liquid market, as the British Pound is the fourth most liquid currency and the UK is the global financial center
Cross-asset, cross-geography, and cross-currency diversification, for market participants seeking to ad foreign UK bonds
The risks of a bulldog bond:
Interest rate risk, if the Bank of England raises interest rates and therefore borrowing costs, which also lowers the potential of income derived from the interest rate differential
Currency risk, if the British Pound declines, the most notable risk for investors, for example, the GBP/USD exchange rate drops from 1.5000 to 1.2500, which can turn a profitable bulldog bond into a loss for international investors
Bulldog Bond Conclusion
A bulldog bond offers non-UK companies an ideal opportunity to raise capital in the UK in British Pounds and achieve lower borrowing costs. It provides access to financing in a liquid currency and market for issuers, while investors get a low-risk financial instrument providing cross-asset, cross-geography, and cross-currency diversification.
Interest rate income adds to the appeal if the interest rate differential is notable, but it also poses a risk as interest rates fluctuate. The most significant risk to consider is currency exchange risk, especially for foreign investors buying a bulldog bond in their currency. It can impact the profitability of the investment, a risk more dominant for investors versus short-term traders.
Is a bulldog bond a Eurobond?
A bulldog bond is not a Eurobond, as it remains priced in British Pound, issued by British banks with UK interest rates as the basis, and traded in the UK. Eurobond pricing is in Euros, issued by Eurozone banks under the ECB monetary policy, with an internationally listing.