Key Takeaways
- Issued by foreign banks' U.S. branches in USD.
- Large minimums, typically $100,000 to $5 million.
- Not FDIC-insured; carries foreign bank credit risk.
- Short-term, negotiable, with fixed or variable rates.
What is Yankee CD?
A Yankee CD, or Yankee Certificate of Deposit, is a negotiable time deposit issued in U.S. dollars by the U.S. branch of a foreign bank. Unlike domestic CDs, Yankee CDs provide exposure to foreign financial institutions while adhering to U.S. banking regulations.
This instrument is part of the broader Yankee market, where foreign entities access U.S. capital markets, often denominated in xenocurrency such as the U.S. dollar.
Key Characteristics
Yankee CDs have distinct features that differentiate them from other certificates of deposit:
- Issuer: Typically issued by the U.S. branches of foreign banks, making them foreign obligations under U.S. jurisdiction.
- Denomination: Large minimum deposits ranging from $100,000 to $5 million, targeting institutional or accredited investors.
- Maturity: Short-term, usually under 12 months but can extend to 2 years, with fixed or variable interest rates.
- Negotiability: Tradable in secondary markets, though liquidity depends on custodian arrangements.
- Insurance: Not insured by the FDIC, exposing investors to the credit risk of the foreign bank.
- Purpose: Enables foreign banks to raise USD capital efficiently without establishing full U.S. banking operations.
How It Works
When you invest in a Yankee CD, the foreign bank's U.S. branch issues a certificate to your custodian bank after you agree on the deposit amount, interest rate, and maturity date. Your custodian verifies the certificate and processes the payment through Fedwire using federal funds.
At maturity, you redeem the principal and interest by presenting the certificate through your custodian. Secondary market transactions are settled either same-day or next-day, often involving physical certificate transfers between custodian banks. This setup allows you to gain exposure to foreign credit risk while maintaining U.S. dollar holdings.
Examples and Use Cases
Yankee CDs are favored by institutional investors and high-net-worth individuals seeking diversification and yield:
- Airlines: Companies like Delta may indirectly influence the demand for such instruments through their treasury operations and currency exposure.
- Bond Investors: Those interested in fixed income might consider complementing Yankee CDs with bond ETFs such as best bond ETFs to diversify credit and liquidity risks.
- Foreign Banks: Scotiabank and other foreign institutions issue Yankee CDs to raise capital in the U.S. market efficiently.
Important Considerations
While Yankee CDs offer attractive yields and foreign exposure, you should be aware of their risks. They are not insured by the FDIC, so you bear the credit risk of the foreign issuer. Additionally, liquidity can be limited due to the negotiable nature requiring custodian involvement for secondary market trades.
Understanding the face value and terms of the certificate is critical before investing, and you might want to explore how these instruments compare with domestic CDs or kangaroo bonds for broader international fixed-income exposure.
Final Words
Yankee CDs offer higher yields and diversification but carry foreign credit risk and lack FDIC insurance, making them suitable primarily for large, sophisticated investors. Evaluate your risk tolerance and compare rates before considering a purchase.
Frequently Asked Questions
A Yankee CD is a negotiable certificate of deposit issued in U.S. dollars by the U.S. branch of a foreign bank. It typically targets institutional or high-net-worth investors with large minimum denominations, offering fixed or variable interest rates over short maturities.
Unlike a domestic jumbo CD issued by U.S. banks, a Yankee CD is issued by the U.S. branch of a foreign bank. While both have large minimum denominations, Yankee CDs involve foreign bank credit risk and are not insured by the FDIC.
No, Yankee CDs are not FDIC insured. Because they are obligations of foreign banks’ U.S. branches, investors are exposed to the credit risk of the foreign parent institution rather than being protected by U.S. deposit insurance.
Yankee CDs are primarily designed for institutional investors and high-net-worth individuals, as they require large minimum investments—usually starting around $100,000 to $1 million. They are not suitable for most retail investors.
Yankee CDs usually have short maturities, often less than 12 months but can extend up to two years. They offer fixed or variable interest rates, which can be negotiated directly with the issuer or through dealers.
Investors agree on the rate, amount, and maturity with the issuer, and the certificate is delivered to their custodian bank. Payments and redemptions at maturity are processed via Fedwire, enabling secure and efficient transactions.
Foreign banks use Yankee CDs to raise U.S. dollar capital from American investors without establishing a full U.S. banking presence. This provides diversification for investors and access to U.S. markets for foreign banks.
Yes, Yankee CDs are negotiable and can be traded in secondary markets. Trades typically settle on the same or next day, with physical certificate transfer between custodian banks often involved.
