The Brady-Euro Yield Differential Debate: Why Arbitrage is Infeasible

By Federico L. Kaune Moreno, Elaine Karen Buckberg

November 1, 1996

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Federico L. Kaune Moreno, and Elaine Karen Buckberg. The Brady-Euro Yield Differential Debate: Why Arbitrage is Infeasible, (USA: International Monetary Fund, 1996) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Brady bonds offer substantially higher returns than Eurobonds. This paper examines the Brady and Eurobond markets for developing country debt and finds that the apparent arbitrage opportunity is not only smaller than it at first appears, but is infeasible given the illiquidity of the Eurobond market. The maturity adjusted return differential between Brady and Eurobonds is smaller than the commonly cited yield spreads. Moreover, the transactions costs of executing a Eurobond short contract render arbitrage a loss-making proposition. Given the many crossover investors who are active in both the Brady and Euro markets, why do Eurobond investors not trade them actively?

Subject: Bond yields, Bonds, Financial institutions, Financial markets, Financial services, International capital markets, Treasury bills and bonds, Yield curve

Keywords: Bond yields, Bonds, Brady bond, Differential debate, Eurobond, Eurobond issue, Eurobond yield series, International capital markets, Quoted yield differential, Treasury bills and bonds, WP, Yield, Yield curve, Yield premium

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1996/127
Stock No:

WPIEA1271996
ISBN:

9781451935912
ISSN:

1018-5941

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