ARI SHAPIRO, HOST:
Since the Hamas attack last October, Israel has sold $2 billion worth of a unique type of bond called the diaspora bond. Our colleagues at The Indicator From Planet Money can explain what that is. Here's Darian Woods and Wailin Wong.
WAILIN WONG, BYLINE: Every once in a while, Mitu Gulati gets these phone calls. He's a law professor at the University of Virginia, and he specializes in a niche area of finance called sovereign debt. That's the money that governments borrow.
DARIAN WOODS, BYLINE: And there's one question that Mitu has gotten asked a couple of times.
MITU GULATI: Do you know about how to do diaspora bonds?
WONG: These are bonds that governments sell to people who live elsewhere but still feel a connection to their countries of origin.
WOODS: It's a fundraising tool that countries from India to Ethiopia have experimented with. But there's just one country that's raised billions of dollars through a long-running diaspora bond program, and that country is Israel.
WONG: Israel launched its diaspora bond program in 1951. The country needed money for infrastructure and development, and it was getting a chilly reception from Wall Street.
WOODS: So the government came up with a way to raise money from individual supporters living overseas. Then-Prime Minister David Ben-Gurion went on an American tour to pitch a new kind of savings bond.
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DAVID BEN-GURION: We are appealing to the people of this country to participate with us in the rebuilding of our homeland.
WOODS: Mitu says there is this prevailing idea in policy circles that governments could use diaspora bonds to borrow money at a much cheaper interest rate than what they could if they went to international financial markets.
WONG: The thinking is that governments get a patriotic discount because the buyers of diaspora bonds are motivated by loyalty and charity. Mitu and two other researchers recently released a paper that put this idea to the test.
GULATI: Most of the time, there is no patriotic discount.
WONG: Mitu's research showed that, for most of the last 13 years, Israeli diaspora bonds have actually paid a slightly higher rate of interest than the country's standard government bonds. There are just two main periods where this dynamic really flips and the payout on diaspora bonds gets a good deal lower.
WOODS: One is the start of the pandemic in 2020, and the second is after the Hamas attacks of October 2023. During both of these emergency situations, Israel paid lower interest rates on its diaspora bonds, but the government banked on people still buying them out of a sense of solidarity.
WONG: For Mitu, Israel's diaspora bond program represents an economic relationship that is neither all about charity nor all about profits, but a unique intersection of these two motivations. And for some state governments here in the U.S., they're also seen as a low-risk investment. Michael Frerichs manages Illinois' investment portfolio.
MICHAEL FRERICHS: We have been purchasing these Israel bonds for over 20 years. We get a good return. But after the Hamas attack on Israel, we figured that they would be issuing more bonds, and we also wanted to show our support for an ally at a time of a terrorist invasion.
WOODS: Two years ago, Mitu Gulati got a phone call from somebody wondering if Ukraine could tap loyal supporters in the U.S. to raise money for its defense. Nothing came of that conversation. But lately, with Congress at a standstill over funding Ukraine, Mitu's been getting phone calls again.
WONG: Wailin Wong.
WOODS: Darian Woods, NPR News.
SHAPIRO: And you can hear a deeper dive into diaspora bonds on the NPR podcast The Indicator.
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