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

• 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.

• It should abide by the rules and regulations of the country of issue, like domestic bonds of that country. The Eurobond is, however, subject to an exception as they are not subject to any particular country's regulations. 

Snapshot of an International Bond

Classification of International Bonds

Pros and Cons 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 and cons associated with investing in international bonds.

Pros

• 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.

• 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.

• 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.

Cons

• Increased Risk - Even if investing in international bonds brings the benefit of diversification, it also contains certain risks. For instance, if the other country faces an economic crisis, it can translate into 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.

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

When the issuer pays in the bond's original currency upon maturity, that same amount may convert into a lower amount in the domestic exchange rate of the investor.

• Lack of Liquidity - Bonds in International bond markets lack liquidity, whereby 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

1. 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:

a. 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

• 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.

• 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.

b. 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 years 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 years 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%.

C. 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:

• Stable forex in a liquid market since the British Pound is the fourth most liquid currency.

• Low cost of borrowing if UK interest quotes are low

• Access to financing

2. 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

a. Straight Bond- It is one containing a specified interest coupon and a specified maturity date. 

b. 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.

c. 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

• The Eurobond market brings forward freedom and flexibility not found in domestic markets.

• The cost of issuing Eurobonds stands at around 2.5% of the face value of the issue, which is relatively cheaper than domestic bonds.

• Maturities in the Eurobond market are suited to long-term funding requirements

Researched and authored by Alvin Dookhony | LinkedIn

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