International Bonds

What are International Bonds?

An international bond is a debt instrument issued in a country by a foreign entity. It can be identified in the currency of its issuer’s native country, and it’s similar to a traditional bond whereby it pays interest at specific intervals and its principal amount back to the bondholder at maturity.

Key characteristics of International Bonds are:

• They usually involve participants, including Governments, traders, institutional investors, and individuals.

• As per the reports of the ICMA, the size of the international bond market is expected to be around $130 trillion US dollars.

• Like the domestic bonds of the country of issue, Eurobonds should abide by the rules and regulations of that country. However, they are an exception as they are not subject to any particular country’s regulations. 

Advantages of Investing in International Bonds

Investors willing to seek international bonds should first gain a good understanding of these investments' advantages and disadvantages. Below are some of the pros associated with investing in international bonds.

1. Increased Exposure

Investment in the international bond market opens up a great opportunity for those seeking exposure to foreign economies. For instance, if an Indian citizen expects the British economy to perform well in the coming years, he can invest in British bonds through the international bond market.

2. Higher Returns

International bond markets usually offer a higher interest rate than domestic bonds. This can be explained by the higher risk level they carry since they are brought in from a foreign country.  Investment in an international bond is a great way to boost your portfolio's returns.

3. Hedging

For example, an individual residing in the US might be experiencing losses due to the US dollar falling in value. In that situation, the latter can invest in the bond issues of a country whose currency is stronger and is gaining.

Disadvantages of Investing in International Bonds

Investing in international bonds can provide diversification and access to broader markets, but it also comes with notable disadvantages. These disadvantages can significantly impact the investment's overall performance.

1. Increased Risk

Even though investing in international bonds offers the benefit of diversification, it also carries certain risks. For instance, if another country faces an economic crisis, it can result in losses for the investors. 

When it comes to international bonds, it might be challenging for the investor to fully understand the political and economic climate of the foreign nation.

2. Exchange Rate Volatility

For some international bonds, issuers will issue bonds in the investor's non-domestic currency. For instance, bonds issued in India are in Euros. This makes the investor vulnerable to fluctuations in the exchange rate of that currency.

3. Lack of Liquidity

Bonds in international bond markets lack liquidity, so converting them into cash is not an easy process. 

If an investor wants to cash his investment, it's easier for him in the case of domestic bonds, as finding a buyer for the domestic bonds is easy.

On the other hand, finding a buyer for an international bond can be quite difficult as the number of international bond investors is much lower than domestic ones. Hence, bonds in the international bond markets lack relative liquidity.

Types of International Bonds

Foreign Bonds

The issuer of foreign bonds are resident of one country but issues the bond in a country other than his home country. It is a common practice that international firms use to raise capital to fund their projects. 

The higher their level of business in the domestic market, the higher the number of foreign bonds issued.

To put it in simple terms, they are loans that investors give to a government or business from a foreign country. In exchange, the investor receives interest and their invested amount upon the bond's maturity.

Foreign bonds can be broken down as follows:

1. Yankee Bonds

They are US dollar-denominated debt securities issued by foreign borrowers such as foreign governments, supranational, and highly rated corporate borrowers in the US bond markets. 

Yankee Bond has certain peculiar features associated with the US domestic market.

Foreign borrowers of the Yankee bonds are required to adopt the US accounting practices, and the US credit rating agencies will have to give ratings for these bonds.

These bonds are sponsored by a US domestic underwriting syndicate and require registration at a security and exchange board of their domestic country before selling in the US domestic market.

Advantages of Yankee Bonds

1. Better yield than Domestic Bonds: Yankee bonds offer more significant returns than similar rated U.S bonds. This eventually gives the investor a preferred position to gain significant yields on their invested money.
2. Helps in investing in emerging markets: Yankee bonds also enable investors to channel resources into business sectors outside the U.S. 

For example, by adding resources to a developing sector, the latter will enable the investor to benefit from the development story of that developing business sector.

2. Samurai Bonds

It came into existence in 1970 when the Japanese government made it possible for foreign entities to invest in its markets through the issuance of Yen-denominated bonds. 

Opening the Samurai bond market was to deal with Japan’s excessive foreign currency reserve.

Non-Japanese borrowers issue these Foreign bonds in the domestic Japanese markets. In this case, borrowers are usually supranational and have a minimum investment grade rating of A. 

Borrowers of Samurai Bonds are required to follow the rules and regulations of the Japanese market.

These companies issue their bonds to acquire the local currency in the Japanese market. Financial samurai bonds are an attractive instrument for investors in Japan as the risk of currency variation is non-existent. 

For example, the Indonesian government issued samurai bonds worth 100 billion Yen. The bonds were issued in three intervals. The first series of issuance was a 3-year maturity worth a total of 40 billion Yen with a coupon rate of 0.65%.

The second series was issued with a worth of 50 billion Yen with a 5-year maturity time period and a coupon rate of 0.89%. Finally, the last and third series for the remaining 10 billion yen was issued with a 7-year tenor and a coupon rate of 1.04%.

3. Bulldog Bonds

In finance, the term bulldog bonds refers to bonds issued by a foreign entity/ company in the UK. It is also a direct reference to the animal that serves as a national symbol in England, which was first associated with Sir Winston Churchill during World War.       

Those bonds are issued by UK book runners on behalf of foreign companies and governments. Bulldog bonds are denominated in British Pounds since this facilitates trading on the UK stock market.

Whenever a foreign corporation wishes to raise capital from investors in the United Kingdom, they issue Bulldog bonds. 

This is particularly done when the interest rates in the UK are low relative to the foreign corporation’s domestic interest rates, which eventually reduces their interest expense.

Bulldog bonds are a popular investment due to the fact that the GBP ranks as the fourth maximum liquid forex, trailing the Euro, the Japanese Yen, and the US Dollar. In addition, the economic system of the UK is known to be strong, stable, and reliable.

Benefits offered by the Bulldog Bond

1. Stable forex in a liquid market since the British Pound is the fourth most liquid currency.
2. Low cost of borrowing if UK interest quotes are low
3. Access to financing

Eurobonds

Those types of international bonds are often issued by corporations and governments requiring long-term funds. They are mostly sold through a geographically diverse group of banks to investors around the globe. They are similar to domestic bonds, including a fixed or floating interest rate.

Types of Eurobonds

1. Straight Bond: It is one containing a specified interest coupon and a specified maturity date. 
2. Convertible Eurobond: Like the Straight Bond, it contains a specified interest coupon and maturity date. Nevertheless, it also includes an option for the holder to convert its bonds into an equity share of the company at a conversion price set at the time of issue.
3. Medium-term Eurobond: A short-term Eurobond with a maturity period ranging from three to eight years. Their issuing procedure is less formal compared to larger bonds.

Advantages of Eurobonds

1. The Eurobond market brings forward freedom and flexibility that are not found in domestic markets.
2. The cost of issuing Eurobonds stands at around 2.5% of the face value of the issue, which is relatively cheaper than domestic bonds.
3. Maturities in the Eurobond market are suited to long-term funding requirements.

Global Bonds

Global bonds are debt instruments that governments, businesses, and other organizations issue to raise money on global markets. Because of their larger investor base, they may provide finance for issuers at reduced costs and diversification prospects for investors.

Types of Global Bonds

1. Sovereign Bonds: These are issued by national governments to fund their initiatives; these are usually issued in foreign currencies. Their government support makes them safe.
2. Corporate Bonds: These are issued by companies to fund their operations. Access to bigger capital pools and possibly advantageous borrowing terms are provided by these bonds.
3. Supranational Bonds: These are published by global institutions such as the World Bank to finance development initiatives. Their excellent credit scores make them low-risk.

Advantages of Global Bond

1. It allows investors to spread risk across different countries, currencies, and economic environments.
2. It enables issuers to reach a larger, more diverse investor base, which is beneficial for emerging markets.
3. Emerging market bonds may offer higher yields compared to domestic bonds, appealing to risk-tolerant investors.
4. Holding bonds in different currencies can mitigate currency fluctuation impacts.

Conclusion

For investors looking for exposure to international markets, increased returns, and diversification, international bonds offer a strong alternative.

These bonds are available in a number of formats, each with its own advantages and disadvantages, including corporate, supranational, sovereign, and Eurobond bonds.

International bonds expose investors to higher risks, such as exchange rate volatility, political and economic instability, and reduced liquidity, even while they can improve portfolio returns and act as a hedge against domestic market changes.

Making wise investing selections requires an understanding of the unique qualities and possible hazards of foreign bonds.

In the end, foreign bonds can contribute significantly to a portfolio of well-diversified investments by providing chances to profit from expansion and growth in the world economy.

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