International bonds offer investors a unique opportunity to diversify their portfolios by gaining exposure to global markets. These debt securities, issued outside an investor’s home country, can be a valuable addition to a well-rounded investment strategy. From government bonds in Europe to corporate bonds in Asia, international bonds provide regular interest payments and return the principal upon maturity, much like domestic bonds. This guide will delve into the types, features, and benefits of international bonds, helping you understand how they can fit into your investment plan.
What are International Bonds?
An international bond is a debt security issued by an entity outside an investor's home country. For instance, an international bond fund domiciled in the United States might hold Australian government bonds, Chinese corporate bonds, and bonds issued by governments and corporations from many other countries.
Like other types of bonds, international bonds generate interest payments at regular intervals and return investors' principal when the bond matures.
Many American mutual funds also hold the same bonds in their portfolios. International bonds are mostly bought by investors to get overseas exposure and diversify.
Types of International Bonds
Investors in the U.S. often focus on three broad categories of international bonds: eurobonds, global bonds, and Brady bonds. Here's a brief explanation of each:
- Eurobonds: These are bonds issued in a currency different from the currency of the country in which they are issued. For example, a bond issued by a Japanese company in U.S. dollars, but sold in Europe, is considered a eurobond. These bonds allow issuers to attract capital from international investors without being tied to their home currency.
- Global Bonds: Global bonds are issued simultaneously in multiple markets and are available in various currencies. A global bond might be issued by a corporation or government and sold in both the U.S. and European markets, allowing for a broad investor base and greater liquidity.
- Brady Bonds: These bonds were created in the late 1980s as part of a plan to help emerging-market countries restructure their debt. Named after former U.S. Treasury Secretary Nicholas Brady, these bonds are issued by developing countries and are typically backed by U.S. Treasury bonds, making them more secure than regular emerging-market bonds.
Features of international bonds
A bond therefore offers investors fixed income at specified interest, which attracts governmental and non-governmental organizations, corporations and businesses.
International bonds are denoted in foreign currencies and usually sold across international borders, hence contributing to the factor of reducing the borrowing costs of the issuers. Such bonds cause the culture of savings among various classes of investors due to the opportunity to have savings and gain wealth in international bonds and foreign currencies.
A debt market is the market where trading is done in debt securities or instruments. It generates a fixed return to investors in debt in the form of interest. Within this market domain, international bonds are traded. The debt market is further divided into two segments: primary and secondary. The primary market is a market for new issues, while the secondary market refers to an existing security market.
In the international market, foreign entities invest in those issued by governments, corporations, or business organizations.
International Bonds vs. Foreign Bonds
Though the terms are used almost interchangeably, international bonds and foreign bonds are different.
Foreign bonds refer to those bonds that are issued in a particular market and are thus denominated in that market's money but are issued by a foreign company. For example, a U.S. company operating in Canada might issue a bond in Canada, denominated in Canadian dollars.
Foreign bonds often possess special names signifying the currency or nation where they are issued. In the previous example, it would be named a Maple bond. Other examples include:
Samurai bonds – issued in Japanese yen
Yankee bonds – issued in U.S. dollars
Matilda bonds – issued in Australian dollars
Bulldog bonds – issued in British pounds sterling
Bottom line
Investing in international bonds can be a strategic move for those looking to enhance their portfolio's diversification and gain exposure to foreign markets. While these bonds offer many of the same benefits as domestic bonds, they also come with unique opportunities and risks tied to currency fluctuations and global economic conditions. For investors seeking stability with higher returns, considering options like Compound Real Estate Bonds, which offer an 8.5% APY, might be a complementary strategy alongside international bonds. Balancing global exposure with reliable, high-yield domestic options can help you achieve a well-rounded and resilient investment portfolio.
