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Passive Income Investments | International Bonds

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International bonds can be a great way to diversify a passive income investment portfolio. In this article you'll learn the basics about investing in these more exotic debt securities...

  • International bonds as an investment for passive income
David Garner
David Garner
Published On: September 11th, 2023

Passive Income Investments | International Bonds

International bonds are debt securities issued by foreign governments, municipalities, or corporations outside the investor’s home country.

For the US public, this means bonds that are not issued by entities within the United States.

Just as domestic bonds are a way to lend money in exchange for interest payments and the eventual return of the principal, international bonds serve the same purpose but with the added dimension of cross-border investing.

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Different Kinds of International Bonds Available

For the US public, the types of international bonds that can be purchased include:

  1. Foreign Bonds: These are bonds issued by a foreign entity in the currency of the country where it’s being sold. An example for Americans would be the “Yankee bonds”, which are dollar-denominated bonds issued in the US by foreign entities.
  2. Eurobonds: Despite the name, Eurobonds are not limited to Europe. They are bonds issued in a currency other than that of the country where they are issued. For instance, a bond issued by a Brazilian company in US dollars in Europe is a Eurobond.
  3. Global Bonds: These are bonds that are issued simultaneously in the domestic market as well as in Eurobond markets. They provide flexibility to the issuers and can be sold in multiple jurisdictions.
  4. Emerging Market Bonds: Bonds issued by countries or corporations in developing nations. They typically offer higher yields to compensate for increased risks.

How Investors Can Buy and Sell International Bonds

The process for buying and selling international bonds is similar to that of domestic bonds. Investors can:

  • Purchase through a broker who has access to international markets.
  • Buy mutual funds or exchange-traded funds (ETFs) that focus on international bonds.
  • Participate in initial offerings, similar to an initial public offering (IPO) for stocks.

What Impacts the Price of an International Bond?

Several factors can influence the price of international bonds:

  • Interest Rates: Generally, when interest rates rise, bond prices fall and vice-versa.
  • Currency Fluctuations: Changes in the relative value of currencies can impact the returns on international bonds, especially if the bond is denominated in a currency different from the investor’s home currency.
  • Economic and Political Factors: Economic health, political stability, and creditworthiness of the issuing country can influence bond prices.
  • Supply and Demand: Just like any market, the supply of and demand for specific bonds can impact their price.

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Why Investors Buy International Bonds

There are several reasons:

  • Diversification: International bonds can diversify a portfolio, potentially reducing risk.
  • Yield Opportunities: Some international bonds might offer higher yields than comparable domestic bonds.
  • Speculative Gains: Investors might anticipate currency movements or interest rate changes that could lead to profits.

Benefits of Investing in International Bonds

  • Diversification: Investing in different economies can reduce exposure to any single market’s volatility.
  • Potential for Higher Returns: Emerging markets or economies recovering from downturns might offer attractive yield opportunities.
  • Currency Appreciation: If the bond’s currency appreciates against the US dollar, investors can benefit from currency conversion.

Risks of Investing in International Bonds

  • Currency Risk: Currency values can fluctuate, impacting the return when converted back to the home currency.
  • Economic and Political Risk: Foreign countries might have unstable political environments or weaker economic structures.
  • Liquidity Risk: Some international bonds might be less liquid than domestic ones, making them harder to sell.
  • Interest Rate Risk: Changes in foreign interest rates can affect bond prices.
  • Default Risk: The issuing entity may not repay the bond.

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Conclusion

International bonds offer US investors an opportunity to diversify their portfolios and tap into potential growth in foreign markets.

However, like all investments, they come with their own set of risks. It’s essential for investors to thoroughly research and understand these risks and benefits before diving into the world of international bonds.

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