What Is an International Bond?

What Is an International Bond?

Let me explain what an international bond is—it's essentially an investment in debt issued by a foreign entity. If you're in the U.S., think of a bond fund that puts money into Australian government bonds, Chinese corporate bonds, or similar debt from abroad.

Just like any bond you know, these pay interest at set times and return the principal when they mature. You'll find many U.S. mutual funds holding them, and investors often buy in to spread out their portfolios with some foreign exposure.

Key Takeaways

An international bond is a debt obligation from a non-domestic entity, usually in its own currency. Most are corporate, but some government bonds fit too. They help diversify your portfolio, but remember, currency risk is always there.

Understanding International Bonds

As businesses go global, they look for cheaper financing beyond their home turf. Instead of sticking to local investors, companies and governments reach out to global pockets for capital.

Issuing international bonds is one way they do this. These are typically issued within the issuer's borders and in their local currency. From your U.S. viewpoint, it's any bond from a foreign corporation or government in a non-dollar currency.

Types of International Bonds

You should know the main categories that matter to U.S. investors: eurobonds, global bonds, and Brady bonds.

Eurobonds

Eurobonds get issued in a currency that's not the issuer's native one. Take a Swiss company building in Mexico—it might issue a peso-denominated bond to get those pesos directly, likely cheaper than a local bank loan. Mexican buyers avoid currency exchange risks.

It can get trickier, like a French company issuing a U.S. dollar bond in Japan—that's a eurodollar bond. You'll also see euroyen in yen or euroswiss in francs.

Global Bonds

Global bonds are like eurobonds but can trade and issue in the country of the bond's currency. For instance, a French company could issue a U.S. dollar bond offered in both Japan and the U.S.

Brady Bonds

Brady bonds are U.S. dollar-denominated sovereign debt from other nations, backed by U.S. Treasuries. They're seen as emerging markets bonds, created in 1989 under Treasury Secretary Nicholas Brady to help developing countries restructure debt and stabilize finances. Most are below investment grade.

International Bonds vs. Foreign Bonds

Don't mix up international and foreign bonds—they're different. A foreign bond is issued in one market, in that market's currency, but by a foreign company. Say, a U.S. firm issues a Canadian dollar bond in Canada—that's a Maple bond.

Other examples include Samurai bonds in yen, Yankee in dollars, Matilda in Australian dollars, and Bulldog in pounds. Foreign bonds target local buyers in the issuance country, while international bonds are issued in one place but sold globally.

Special Considerations

To clarify, international bonds aren't the same as foreign bonds. Foreign ones are from a foreign issuer in a local market's currency, bought mostly by locals there. International bonds go out to investors worldwide.

Yes, there are international bond funds like Fidelity Global Credit Fund (FGBFX), Templeton Global Bond Fund (TPINX), and PIMCO Global Bond Fund Unhedged—they invest in foreign corporate and government debt.

For ETFs, check iShares International Treasury Bond ETF (IGOV), SPDR Bloomberg International Treasury Bond ETF (BWX), or Invesco Total Return Bond ETF (GTO). Be careful—'high-yield' often means 'junk,' so always verify credit ratings and risks.

The Bottom Line

International bonds let you diversify by accessing foreign securities that don't always move with your local markets. But since they're in foreign currencies, their value shifts with exchange rates and economic conditions between countries.

That introduces currency risk, and you might face unfamiliar regulations or taxes. Approach them cautiously.