A foreign bond is a debt instrument issued by a government or corporation in a foreign country’s domestic market, denominated in that country's currency. This type of bond serves as a method for raising capital and is often utilized by companies with significant business interests in the target market. Foreign bonds are typically named after the country where they are issued, such as Yankee bonds in the U.S., Samurai bonds in Japan, or Bulldog bonds in the U.K. For example, if a Japanese corporation issues a bond in the U.S. denominated in U.S. dollars, it would be classified as a foreign bond. Understanding the different types of foreign bonds, along with their unique characteristics, can help investors diversify their portfolios and manage risk effectively.
What Is a Foreign Bond?
A foreign bond is, in essence, a bond issued by an entity—that is, a government or corporation—in someone else's domestic market and denominated in that country's currency as a method of raising capital. Any company with some meaningful business in a given domestic market often issues foreign bonds. Such bonds are often named for the country in which they are issued, such as Yankee bonds in the U.S., Samurai bonds in Japan, or Bulldog bonds in the U.K. For instance, a Japanese company issuing bonds in the U.S. and denominated in U.S. dollars would be issuing a foreign bond.
Examples of foreign bonds
There are several types of foreign bonds, each with distinct characteristics. For example, a Bulldog Bond is issued in the United Kingdom by a foreign bank or corporation and is denominated in British pounds. Foreign corporations often issue these bonds when interest rates in the UK are lower than in their home country.
A Matilda Bond is issued in the Australian market by a non-Australian company. For instance, in June 2016, Apple Inc. sold $1.4 billion in Matilda bonds, with maturities in June 2020, January 2024, and June 2026. Apple joined other companies like Qantas Airways Ltd., Coca-Cola Co., and Asciano Ltd. in issuing securities with maturities extending beyond the typical seven-year limit for nonfinancial corporate borrowers.
A Samurai Bond is a corporate bond issued in Japan by a non-Japanese company. In May 2016, French bank Societe Generale SA issued $1.1 billion in Samurai bonds, including senior and subordinated bonds with a seven-year maturity. This followed a $1.08 billion offering by Bank of America Corporation in a euro-yen format earlier that month.
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Types of Foreign Bonds
Yankee Bonds
Yankee bonds refer to dollar-denominated bonds by foreign issuers in American bond markets. These issuers are mostly foreign governments, supranational organizations, and corporate borrowers of the highest rating. There are some requirements for the issue of Yankee bonds. For instance, they are subject to the SEC, which implies that full disclosure of the relevant information has to be made. The issuers report according to the American accounting standards and must be rated by the American rating agencies. These bonds are supported by an American domestic underwriting syndicate and have to be registered with the Securities and Exchange Commission before being issued in the U.S. market. More importantly, Reliance Industries Ltd. was able to issue a 50-year USD 50 million Yankee bond, which was quite an achievement for the market.
Samurai Bonds
The Samurai bonds are those that are issued in Japan's domestic markets by non-Japanese borrowers in yen denomination. In order to be able to issue such bonds, the issuers must have at least an investment-grade rating, such as A, and almost always are supranational organizations. Maturities for these bonds vary from 3 to 20 years. Although the emphasis is on the supranational entities, some of the issuers considered for Samurai bonds include sovereign borrowers and high-quality private corporations, mainly those that have strong trade links with Japan. The settlement and administration costs for a Samurai bond are nevertheless very high.
Bulldog Bonds
Bulldog bonds refer to those sterling-denominated bonds that foreign entities issue in the UK's domestic securities market. Such bonds have varying maturities between 5 and 25 years or more; thus, they provide an excellent alternative instrument for foreign borrowers raising capital in the UK.
Conclusion
Foreign bonds present a unique opportunity for investors seeking to diversify their portfolios with international exposure. By understanding the characteristics and risks associated with different types of foreign bonds, investors can make informed decisions that align with their financial goals. Alongside traditional foreign bonds, consider exploring innovative investment options like Compound Real Estate Bonds. Backed by U.S. Treasuries and real estate, these bonds offer a secure and high-yield investment with a fixed 8.5% APY, providing stability and growth potential in an ever-changing global market.
