International Bonds vs Domestic Bonds
When it comes to investing in bonds, you will need to decide whether you will focus on domestic options, international bonds, or a combination of the two.
While domestic bonds are generally considered the safest option since they are issued by corporations and federal agencies, adding international bonds to your portfolio is a great option for diversification.
What Are International Bonds?
International bonds are those that are those that are issued by corporations or governments in other countries. These bonds are issued outside of the United States and are generally backed by the currency of the native country.
These types of bonds work in the same way as domestic bonds, which means the corporation or entity agrees to pay back the initial investment plus interest in a specified time.
However, there are also significant differences that need to be considered.
Eurobonds are a type of international bond that allows companies and governments to attract improved debt capital on a global level.
This term is used to describe bonds that are sold and issued outside of the given country and is denominated in a differing currency from that used in the country in which it is issued.
Foreign bonds are a type of international bond that is issued by an organization in a different country.
These bonds are denominated in the currency of the country in which it is issued, rather than the currency of the issuing country.
These bonds provide different risks and benefits, which need to be understood before adding them to your portfolio.
Yankee bonds are an example of foreign bonds.
International bond issuers also have the option of issuing US dollar denominated bonds to investors in the United States.
These types of bonds, which are referred to as Yankee bonds, are required to be registered with the Security and Exchange Commission (SEC) before they can be offered to US investors.
The benefit of adding foreign bonds denominated in US dollars is that it allows you to diversify your portfolio to take advantage of a greater exposure. This broadened exposure can provide the potential for increased returns based on higher yields.
Additionally, unlike other types of international bonds, foreign bonds decrease the risk associated with varying currency exchange rates.
The most important consideration for foreign bonds is that they are dependent on interest rates.
While interest rates in the US have been low in recent years, there is always the potential that they can begin increasing. When this happens, foreign bonds will go down in value.
USD Denominated Emerging Nations Bonds
One important consideration for international bonds is whether they are USD denominated.
These types of bonds are often issued by emerging nations, and often have a higher yield.