Meaning of International Bonds
Bonds are the type of debt security that is issued to the investor and earns a fixed income at the end of the maturity or period or whenever called. The debt market is the largest security market in the world. Bonds have supremacy over the stock in the current scenario because of their lesser financial risk characteristics.
Bonds are usually domestic bonds or international bonds. Domestic bonds are issued by the investor within the country in their currency. They are usually only traded in their local market. The other type of bond is international bond which is more versatile and possesses more qualities than domestic bonds.
What are International Bonds?
International means beyond the country’s borders. So international bonds mean when the issuer issues and trades the bonds beyond the issuer’s home boundaries. The denomination of the bond is the currency of the issuer. These bonds are usually corporate bonds. The most commonly used international bond index is Fidelity International Bond Index Fund. International bond is one of the cheapest ways to borrow money beyond the country’s limits. The main risk involved in international risk is the currency risk and this risk has a greater rate of risk inherent in them. and the other risk associated with the international bond is that there is a higher chance of loss of money as we cannot claim to recover the investment as the legal obligations of repayment are mostly in favour of the citizens of that particular country. The main participants of international bonds are
- Institutional investors
Another aspect of an international bond is that the principle and the interest are pre-determined in an international bond. Just like usual bonds the price change is inversely proportional to the change in the interest rates.
From the above, we understand certain characteristics of the international bond. Let us now discuss in detail what are the features that international bond has.
Features of International Bonds
- International bonds are less liquid.
- Mostly international bonds are covered by government and semi-government bodies.
- In international bonds, each type of bond is differently rated by credit rating agencies.
- International bonds offer a higher interest rate than domestic bonds as the risk is higher in international bonds.
- There is an increased chance of portfolio development in international bonds and can get higher yields from them.
- They are not liable to the law of any particular country.
- The issue is usually led by a foreign syndicate bank and any foreign currency is traded.
Let us now look into the different types of international bonds in the market.
Types of Bonds In International Bond Market
They are denominated in foreign currency. They are placed in both the domestic market and the Euro market at the same time. Large multinational companies issue these types of bonds. They are very rarely issued in the international bond market.
There is a trade that takes place between numerous countries with different currencies across the world. When a Dutch Company issues bonds in US dollars to China and Japan this transaction can be called a transaction of global bonds.
The issuer issues the bond in a currency other than the currency of the country from where the bond is issued. They are usually known by the currency in which it is denominated.The pre-eminent market for Euro bonds in London.
The Euro bonds are usually dominated by Eurodollars and cover almost 30% of the global market. The other common types of Euro bonds are Euroyen and Euroswiss bonds. This is usually the case when a Dutch company issues bonds denominated in the US to India.
They are usually interchangeably used with international bonds but it is very distinct from the international bond. This is issued in the domestic market by a foreign issuer denominated in the domestic currency.
Usually, the investor is not affected by the ups and downs of the foreign exchange market as the bond is issued in their domestic currency. There are many examples of foreign currency with cute nicknames like Bulldog bonds traded in the United Kingdom, Matador bonds traded in Spain etc. For example, when a US-based company sells Rupee denominated bonds in India this trade can be stated as a foreign bond trade.
From this, we can understand that international bonds differ on each characteristic which is posted by them. At a glance all of them look the same but when we dig deeper into them each of them is distinct in its way. But have you ever wondered what are the advantages of these bonds over domestic ones? Or rather do they have any limitations in trading? Let us find out the answer.
Advantages of International Bonds
When you invest in a foreign country the negative impacts that occur in your home country will not affect your investment. A person who invests in different kinds of securities will reduce the risk of loss due to this diversification. For example, if you are from Russia, during wartime the bonds that you have purchased from the US will not have the effect of war on the return yield by them.
This is in connection with diversification, the risk of one bond can be hedged using the other one. This is usually adopted to eliminate the forex risk associated with security. The investor is likely to incur loss and also invest in countries with higher chances of attaining return to compensate for the loss which is going to occur to him.
We do not know what time there will be a boom in any part of the country. By investing in international bonds there is higher exposure to the world economies and we can take yield from the growth of foreign countries. If the domestic market is the low international market is the best way to increase your capital yield.
As we know that risk and return are proportionate to each other there is a higher chance of a return in international trade as the risk borne by the investor is much higher than the trade in the domestic market. The interest rate offered by the international market is higher than that of the domestic market.
From the above, we can understand there are some underlying demerits in the international market. Let us closely analyse them.
Disadvantages of International Bond
There is a high chance of currency fluctuation in the international market. The market is unpredictable and the price can fall at any moment. So, the investor is subject to the loss of even his principal amount if there is an unexpected event in the market.
The risk of forex is inevitable in international trade. As the international risk does not comply with the laws of the bearer in case of loss, he cannot claim the money through legal assistance and he has to bear the loss. In domestic bonds, the investor can keep a close eye on the economic fluctuations that take place in the market. But in the case of international transactions, it is difficult for the investor to analyse the market and he can incur a loss in case of a drop in the currency or even unexpected calamities.
Lack of liquidity
We have discussed earlier that international bonds lack liquidity. Mostly all bonds are invested for a fixed period and the investor cannot withdraw the bond before reaching the maturity date. In case the investor needs highly liquid bonds the best is that invests in domestic bonds rather than international bonds
In short, we can understand that if the person is keen to take the risk and expects a higher return on a future date the most preferable for him is the international bond market. On the other hand, if a person needs high liquidity and does not expect a high rate of return can safely insure in domestic bonds.
An international bond market is a place where there is a diversified portfolio available to investors. They can choose the bonds according to the risk they are willing to take. The international bond market places a vital role in building the country’s current economy state. For a person to succeed in trading he should invest in international bonds as well as domestic bonds and hedge the risk between the two. Thus we can conclude that the international bond market is an emerging trading platform to earn high yields for the ones who are willing to take the high risk.