The international bond market consists of bonds that are not confined to a specific country, meaning trading beyond national markets. International bond markets bring together investors from different countries and bonds traded on the global bond markets are known as international bonds. Since the 80s, the international bond market has grown rapidly and now accounts for a large percentage of the total outstanding of the global bond market. Bonds that are issued internationally, like most other bonds, attract interest payments at regular intervals and the investor gets the principal amount back at maturity
Classifications of international bond markets:
Domestic bonds, Eurobonds and foreign bonds are the three types of international bonds. Bonds denominated in currencies other than the dollar are sold and traded on domestic markets, foreign markets and Euro markets. Yankee bonds and Eurodollar bonds are both dollar-denominated bonds.
Let’s have a brief look at them:
Foreign Bonds: In foreign bonds, the issuer is from one country but issues the bonds in another. Bonds are issued by the issuer in the local currency of the country where they are issued. For example, a US company may issue bonds in Indian rupees to raise capital in India. Therefore, Indian investors will not be subject to the ups and downs of the foreign exchange market. They will invest in Indian Rupee, earn interest in Indian Rupee, and receive their principal back in the Indian currency. A bond has to originate from a foreign issuer for it to qualify as a foreign bond.
Euro Bond: As for the Euro Bond, an entity outside the country issues a bond in its own market. In Euro Bonds, the issuer issues bonds in a currency outside the country’s own. Consequently, a Euro Bond issued in the US currency can be issued in any country other than the US. If a US company issues bonds in Japan in Pound Sterling that will also be a Euro Bond. During the 1960s, unfavorable tax regimes in the US led to American companies issuing bonds in US dollars outside of the country, where investors are subject to fluctuations in the foreign exchange rate.
Global bonds: Occasionally, companies also issue global bonds. Global bonds are issued in multiple countries simultaneously and often in different currencies. Usually, global bonds are issued by large multinational corporations.
Benefits of investing in international bond markets
Diversification
By investing in international bonds, investors can diversify their portfolios and reduce the risk of a major loss. An international bond’s returns are not subject to events in your domestic economy.
Higher Returns
Bond markets abroad usually offer higher interest rates than domestic bond markets, since they are riskier for investors coming from other countries. Therefore, investing in the international bond market can potentially increase returns on your portfolio.
Increased Exposure
If you anticipate that the British economy will perform well in the coming years, you can invest in British bonds. This will enable you to take advantage of a foreign economy’s performance.
