Make-Wholes in Sovereign Bonds (Not Sure Why They Are There, but They May Be Free)

Unnoticed in the literature on sovereign bonds, an innovation has been taking place over the past decade and a half. Starting with a single issuance in 2006 by Mexico and two issuances by Brazil in 2007, a small number of issuers have been using what are known as “doomsday†or “make whole†call provisions. These are call options set deep out of the money at issuance, and therefore unlikely to ever be triggered. We report the birth and evolution of the clause over the past fifteen years and ask what drove its application to sovereign bonds. We also estimate its cost for the issuing country. It turns out, at least thus far, that it is free.