investing

Yankee bonds: higher risk, and return

No free lunch

Still, despite their recent popularity, Yankee bonds aren't without risk, Richelson says. That's why they pay investors a premium over domestic corporate bonds.

To start with, many Yankee bonds carry credit ratings low enough to lump in with American "junk" bonds as credit risks, she says. National differences in corporate law, accounting and governance rules also can introduce risk for American investors.

"(Foreign countries) may work under different operating rules. They may have different reporting standards," Richelson says. "You don't know by just looking at the bond."

While Schmieder says differences in corporate accounting standards have been smoothed over by the adoption of International Financial Reporting Standards, differences in the way legal disputes and bankruptcies are handled from country to country can be critical, Schmieder says. In the event of a corporate failure, how much bondholders are paid, or whether they get paid at all, can hinge on bankruptcy laws in that country.

Schmieder also points out that while risk stemming from currency fluctuations is less with Yankee bonds than conventional foreign bonds, it's not entirely absent.

"You can run into a currency mismatch. Basically, you have companies borrowing from you in dollars who may earn a majority of revenues in a foreign currency," he says. "If that currency depreciates, it means that company is going to have to work harder in order to earn enough money to pay your bond off."

How to buy Yankee bonds

Because they're issued in the U.S. and denominated in dollars just like domestic bonds, investing in Yankee bonds is fairly straightforward, Richelson says.

"They would be shown on the bond-trading platforms that retail investors have access to," he says.

If plowing thousands into one corporate bond isn't your cup of tea, you also can get exposure to Yankee bonds by investing in a bond fund that incorporates them into its portfolio. Although there are no funds that exclusively buy Yankee bonds, some corporate bond funds and bond ETFs incorporate them into their mix.

However you choose to invest, keep in mind that Yankee bonds, at the end of the day, are like any other bond: Due diligence is key.

"It's not like you're getting a free lunch, because you may not get a higher yield and it may not be easy to find out how stable these bonds are going to be," Thau says.

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