In recent decades, over 40% of dollar-denominated corporate bonds have been issued by non-US firms. Strikingly, these foreign issuers face an extra discount of 20 bps than their US counterparts. While standard risks fail to account for the discount, the Economic Policy Uncertainty index from Baker, Bloom, and Davis (2016) can explain a substantial portion of this discrepancy, consistent with uncertainty-based model calibrations. Moreover, such foreign discount (USA effect) dominates the dollar safety premium (USD effect). My findings highlight the foreign discount effect in interna- tional corporate bonds, particularly amidst escalating global economic instability and uncertainty.

In the dollar-denominated corporate bond market, 42% of bonds with an amount outstanding of USD 5.9 Trillion are issued by non-US firms. Despite the increasing importance of cross-border financing, foreign issuers are paying an extra premium of 23 bps, compared with their US counterparts. A similar foreign discount exists in the euro-denominated corporate bond and dollar-denominated sovereign bond market. Contrary to the common view, the standard risk and risk aversion cannot explain the discount. I propose a theoretical explanation based on uncertainty aversion. The model can generate the uncertainty effect in the cross-section and the volatility effect in the time series, both are supported by the data. Taking Covid-19 as an event study, I further document a foreign squeeze effect by showing that foreign dollar bonds suffer higher selling pressure relative to US dollar bonds during market turmoil. Such foreign discount (USA effect) dominates the dollar safety premium (USD effect). My results highlight the foreign discount and foreign squeeze effects in the international cross-border investment and financing.