International Bonds

Quick Summary of International Bonds

Any bond issued or invested in across national boarders.

Cross-border bond investing has existed for centuries. There was little activity for much of the 20th century, due to capital and currency controls, but the 1973 collapse of the Bretton Woods system opened the door for the emergence of today’s active markets. This article describes the types of instruments that are traded.

Most countries have some system of financial regulation that applies to securities issued for sale to domestic investors (see articles on the United States and European regulations). Domestic bonds are issued in a country by a domestic issuer for domestic investors. They are denominated in that country’s currency and are subject to that country’s regulations. Some investors purchase another country’s domestic bonds. To do so effectively, they must understand that country’s trading, settlement and accounting practices. They may have to deal with inconvenient time-zone and language differences. The bonds pose foreign exchange risk, and securing reliable credit information can be difficult.

Some bond issuers explicitly want to attract foreign investors. They issue what are known as foreign bonds. These are bonds issued in one country and denominated in that country’s currency by a foreign issuer. The issuer must satisfy all regulations of the country in which it issues the bonds. An example is Yankee bonds, which are foreign bonds sold by some corporations, but mostly by supranational agencies or foreign governments, to investors in the United States. Bulldogs, matadors, Rembrandts, and samurais are foreign bonds issued in the United Kingdom, Spain, the Netherlands and Japan, respectively.

A Eurobond is something different. It is not a foreign bond issued within the European Union. Rather, it is a bond issued and traded within the mostly unregulated Euromarket. While that market originated within Europe—and is still largely centred there—it is a truly international market. Transactions are not subject to any particular nation’s regulations. Bonds are issued in bearer form and usually pay annual (as opposed to semiannual) coupons. They are denominated in various currencies. Since the launch of the euro in 1999, many European corporations have turned to the Eurobond market to diversify their funding away from bank loans. In this way, the Eurobond market has become both an international market and somewhat of an unregulated domestic bond market for Europe.

Arbitrage between the foreign bond and Eurobond markets lead to the development of global bonds. These are bonds that blend characteristics of foreign bonds and Eurobonds and are issued in both markets simultaneously.

Emerging market debt is debt that is issued by governments or corporations in countries whose economies are striving to emerge from underdevelopment. The sector includes domestic bonds, but foreign investors primarily buy bonds issued as Eurobonds or global bonds. Credit risk is a significant issue, and many outstanding bonds are restructured bank loans or restructured defaulted bonds.

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