International Bond Market

Beginning from the 1980s, the international bond market grew aggressively. It today constitutes a large share in the total outstanding of the global bond market. The international bond market is a market for bonds that are traded beyond national boundaries. They pull together investors from different countries. The bonds which are traded in international bond markets are called international bonds. Normally, though not always, these bonds are issued in the issuer’s domestic currency. In fact, it depends on where the subscription is expected. In such a situation the issuer may issue bonds denominated in US Dollar or Euro. Also, international bonds like most other types of bonds, attract interest payments at regular intervals and the investor gets the principal amount back upon maturity of the bond.

International Bond Market has three Classifications:

  1. Foreign Bonds. In foreign bonds, the issuer is from one country but he issues the bonds in some other country. The issuer issues these bonds in the local currency of the country where he is issuing bonds. An example of a foreign bond will be a US company issuing bonds to raise capital in India. The US company will issue the bonds in Indian Rupee. As a result, 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 will get their principal back in Indian Rupee. An Indian company or can also issue bonds in India in Indian Rupee. But these bonds will be called Domestic Bonds. So, for a bond to classify as Foreign Bond, it must come from a foreign issuer.
  2. Euro Bond. In Euro Bond, a foreign entity issues a bond in the domestic market. The issuer issues bond in a currency which is not the domestic currency of that country. So, a Eurobond in US currency can be issued in any country other than the US. If a US company issues bonds in Japan in Pound sterling, it will also be an example of a Eurobond. Eurobond is a result of unfavourable tax regimes of the 1960s in the US. This led to the US companies issuing bonds in US dollars outside of the USA. Here, the investors will be subject to ups and downs in the foreign exchange rate.
  3. Global Bonds. Apart from foreign bonds and euro bonds, some companies, though rarely, issue global bonds. In global bonds, bonds are issued in multiple countries at a go and often in multiple currencies. Usually, large multinational corporations issue global bonds.

Key Features of International Bond Market

  • Participants in the international bond market include Governments, traders, institutional investors, and individuals. However, bonds in the international bond market are less liquid. And for this reason, institutional investors such as pension funds, mutual funds, etc hold a chunk of them.
  • The ICMA expects the size of the international bond market to be around $130 trillion in US dollars. Out of this, corporate bonds account only for 32% of the market. The rest of the market is covering by SSA bonds (government and government agencies).
  • In international bonds, credit rating agencies rate foreign bonds but not Euro bonds. Hence, the entity issuing Eurobond must command considerable credibility to attract investors.
  • Foreign bonds must observe the rules and regulations of the country of issue, like domestic bonds of that country. Eurobonds, however, are not subject to any particular country’s regulations.
international bond market

Advantages of Participation in International Bond Markets

Diversification:

Investment in international bonds provides the benefit of diversification. Diversification decreases the risk of a major loss for the investors. This happens because your returns from an international bond (mostly) will not be subject to negative events in your home economy. So, for example, if your home country witnesses heavy floods, your investment in some foreign country is safe from any negative impact of this event.

Increased Exposure:

Investment in the international bond market provides a great opportunity for those who seek exposure to foreign economies. So, if you are expecting the British economy to perform well in the coming years, you can invest in British bonds through the international bond market. This will enable you to make money out of the foreign economy’s performance. More so, if you do not feel brighter prospects of your domestic economy.

Higher Returns

International bond markets usually offer a higher rate of interest than domestic bonds. The reason is that they are riskier for investors coming from some other country. Hence, investment in the international bond market can potentially boost the returns of your portfolio.

Hedging

If you are prone to a falling US Dollar and making losses out of it, you can invest in international bonds as a hedge. By investing in bond issues of that country whose currency is stronger and is gaining, you can make up for the losses.

Disadvantages of Participation in International Bond Markets

Increased Risk

While investments in International Bond Market provide diversification, it has its own risks. A sudden political uproar can be one factor for high risk. The economic instability of the other country can also lead to losses for the investors. While these risks are present in domestic bonds also, the investor is very much aware of them and can also keep a constant eye on them. In the case of international bonds, it is hard for the investor to be completely aware of the political and economic situation of the foreign country, besides the financial strength of the issuer.

Exchange Rate Volatility

In some types of international bonds, issuers issue bonds in the non-domestic currency of the investor. This makes the investor subject to fluctuations in the exchange rate of that currency. For example, upon maturity, the issuer will pay in the bond’s original currency. But the same amount may convert into a lesser amount in the domestic exchange rate of the investor.

Lack of Liquidity

Bonds in International bond markets do not enjoy much liquidity. If an investor wants to cash his investment, he can easily do so in the case of domestic bonds as finding the buyer for a domestic bond will be easy. But to find a buyer for an international bond can be quite difficult as very few people invest in international bonds. Hence, bonds in international bond markets lack relative liquidity.

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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