An international bond is an investment in debt that is issued by a foreign entity. For example, a U.S.-based international bond fund might invest in Australian government bonds, Chinese corporate bonds, and other government and corporate bonds issued in foreign countries.
As with any bond, international bonds pay interest at specified intervals and repay the principal amount back to bondholders at the maturity date.
Many mutual funds in the United States hold these bonds. Some investors buy international bonds to diversify their portfolios and add exposure to foreign investments.
Key Takeaways
- An international bond is generally a debt obligation issued by a non-domestic entity in its native currency.
- Most international bonds are corporate bonds, but some government bonds are investable assets.
- International bonds offer portfolio diversification but are subject to currency risk.
Embracing Global Diversification with International Bonds
As business becomes more globalized, companies discover ways to access cheaper sources of financing outside of their country of operations. Instead of relying on investors in domestic markets, businesses and governments can tap into the pockets of global investors for essential capital.
One way companies can access the international lending scene is by issuing international bonds.
Most international bonds are issued within the nation’s borders and in its local currency. From the perspective of a U.S. investor, an international bond is one issued by a corporation or government in any non-U.S. dollar currency.
Types of International Bonds
There are several broad categories of international bonds that interest U.S. investors. These include Eurobonds, Global bonds, and Brady bonds.
Eurobonds
Eurobonds are issued in a currency other than the native currency of the corporation or other issuer.
For example, a company based in Switzerland planning to build a manufacturing plant in Mexico might issue a bond denominated in pesos. The company gets direct access to the Mexican pesos needed for the project, likely at a lower cost than borrowing from a Mexican bank. Mexican investors get an investment that doesn’t involve the currency risk of exchanging Swiss francs for pesos.
It can get more complex. For example, a French company might issue a bond in Japan that is denominated in U.S. dollars rather than euros. This is a Eurobond, or more specifically, a Eurodollar bond.
Other common types of Eurobonds are Euroyen bonds, issued in Japanese yen, and Euroswiss bonds, issued in Swiss francs.
Global Bonds
Global bonds are similar to Eurobonds but can also be traded and issued in the country whose currency values the bond.
For example, a global bond could be issued by a French company, denominated in U.S. dollars, and offered to investors in both Japan and America.
Brady Bonds
Brady bonds are sovereign debt securities denominated in U.S. dollars and backed by U.S. Treasury bonds but issued by other nations. Classified by the Federal Reserve as a type of emerging markets bond, they were created by the U.S. to help developing nations with harsh foreign debts.
Part of a program developed in 1989 and named after then-Treasury Secretary Nicholas Brady, the bonds aim to help emerging nations restructure their debts and attain financial stability.
Most Brady bonds are rated below investment grade.
Comparing International Bonds and Foreign Bonds
Although the terms are sometimes used interchangeably, international bonds and foreign bonds are not the same.
Foreign bonds are issued in one market and denominated in its currency but issued by a foreign company. For example, a U.S. company that operates in Canada might issue a bond in Canada valued in Canadian dollars.
Often, foreign bonds bear names reflecting the local currency or country where they’re issued. The bond in the example above would be a Maple bond. Other types 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)
Special Considerations
Are International Bonds the Same as Foreign Bonds?
No. Foreign bonds are issued in one country and priced in that country’s currency, but the issuing corporation is foreign-based. The buyers will primarily be investors in the country where the bonds are issued.
International bonds are generally issued in one country and sold to investors in other countries.
Are There International Bond Funds for Investors?
Many international bond funds invest in corporate and government debt of other countries. Examples include the Fidelity Global Credit Fund (FGBFX), the Templeton Global Bond Fund (TPINX), and the PIMCO Global Bond Fund Unhedged.
Are There International Bond ETFs for Investors?
There are numerous exchange-traded funds (ETFs) that either focus on or include international bonds.
Examples are the iShares International Treasury Bond ETF (IGOV), SPDR Bloomberg International Treasury Bond ETF (BWX), and Invesco Total Return Bond ETF (GTO).
A Word of Caution: ‘High-yield bond’ can be a euphemism for ‘junk bond.’ When investing in bonds, foreign or domestic, check their credit ratings and ensure you understand the risk you are assuming.
The Bottom Line
International bonds are a powerful way to diversify a portfolio, allowing investors to gain exposure to foreign securities that may not correlate with local markets.
However, since international bonds are typically denominated and pay interest in a foreign currency, their value fluctuates with economic conditions and exchange rates between the host country and the issuing foreign country. This subjectivity introduces currency risk. Investors should proceed cautiously, as different regulatory and taxation requirements may apply.
Related Terms: mutual funds, exchange-traded funds, diversification, currency risk, sovereign debt.
References
- The Federal Reserve. “Brady Bonds and Other Emerging Markets Bonds”.
