What Is an International Bond?
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 in order to diversify their portfolios and add some exposure to foreign investments.
key takeaways
- An international bond is generally a debt obligation that is 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.
Understanding 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 much-needed 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 an investor residing in the United States, an international bond is one that is issued by a corporation or government in any country that uses a currency other than the U.S. dollar.
Types of International Bonds
There are several broad categories of international bonds that are of greatest interest to investors in the U.S. They 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 that is based in Switzerland that plans to build a manufacturing plant in Mexico might issue a bond that is denominated in pesos. The company is getting direct access to the Mexican pesos it will need for the project, probably at a lower cost than borrowing from a Mexican bank. Mexican investors are getting an investment that does not involve the currency risk of exchanging Swiss francs for pesos.
It can get more complicated. For example, a French company might issue a bond in Japan that is denominated in U.S. dollars rather than euros. This also 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 they can also be traded and issued in the country whose currency is used to value 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 they are 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 burdensome foreign debts.
Part of a program developed in 1989 and named after then-Treasury Secretary Nicholas Brady, the bonds are meant to help emerging nations restructure their debts and reach financial stability.
Most Brady bonds are rated below investment grade.
International Bonds vs. 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 does business in Canada might issue a bond in Canada that is valued in Canadian dollars.
Often, foreign bonds bear cute names that reflect the local currency or country in which they're issued. The bond in the example above would be referred to as a Maple bond. Other types of foreign bonds 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 corporation that issues it is foreign-based. The buyers will primarily be investors who live in the country in which the bonds are issued.
International bonds are, for the most part, issued in one country and sold to investors in other countries.
Are There International Bond Funds for Investors?
There are many international bond funds that invest in the corporate and government debt of other countries. A few of these funds 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 a number of exchange-traded funds (ETFs) that either focus on or include international bonds.
A few of them are iShares International Treasury Bond ETF (IGOV), SPDR Bloomberg International Treasure Bond ETF (BWX), and Invesco Total Return Bond ETF (GTO).
A note of caution: "high-yield bond" can be a euphemism for "junk bond." When investing in bonds, foreign or domestic, check their credit ratings and be sure you know the degree of risk you're taking on.
The Bottom Line
International bonds are a great way to diversify a portfolio as the investor can gain exposure to foreign securities that may not necessarily move in tandem with securities trading on local markets.
However, since international bonds are typically denominated and pay interest in a foreign currency, the value of the bond will fluctuate depending on the economic conditions and exchange rates between the domestic host country and the foreign country that houses the issuer.
That means international bonds are subject tocurrency risk. Investors should take caution when investing in international bonds because they may be subject to different regulatory and taxation requirements than the ones with which they are familiar.
