What are International Bonds?
International bonds are bonds issued by a country or company that is not domestic for the investor. The international bond market is quickly expanding as companies continue to look for the cheapest way to borrow money. By issuing debt on an international scale, a company can reach more investors. It also potentially helps decrease regulatory constraints.
Quick Summary Points
- The three categories of international bonds are domestic bonds, Eurobonds, and foreign bonds.
- Under dollar-denominated bonds, there are Yankee bonds and Eurodollar bonds.
- Non-dollar denominated bonds are sold and traded in domestic markets, foreign markets, and Euro markets.
Three Categories of International Bonds
There are three general categories for international bonds: domestic, euro, and foreign. The categories are based on the country (domicile) of the issuer, the country of the investor, and the currencies used.
- Domestic bonds: Issued, underwritten and then traded with the currency and regulations of the borrower’s country.
- Eurobonds: Underwritten by an international company using domestic currency and then traded outside of the country’s domestic market.
- Foreign bonds: Issued in a domestic country by a foreign company, using the regulations and currency of the domestic country.
- Domestic bonds: A British company issues debt in the United Kingdom with the principal and interest payments based or denominated in British pounds.
- Eurobonds: A British company issues debt in the United States with the principal and interest payments denominated in pounds.
- Foreign bonds: A British company issues debt in the United States with the principal and interest payments denominated in dollars.
Dollar-denominated bonds are issued in US dollars and offer investors more choices to increase diversity. The two types of dollar-denominated bonds are Eurodollar bonds and Yankee bonds. The difference between the two bonds is that Eurodollar bonds are traded outside of the domestic market while Yankee bonds are issued and traded in the US.
1. Eurodollar bonds
Eurodollar bonds are the largest component of the Eurobond market. A Eurodollar bond must be denominated in U.S. dollars and written by an international company. Since Eurodollar bonds are not registered with the SEC, they can not be sold to the U.S. public. However, they can be traded on the secondary market. Even though many portfolios do include Eurodollar bonds in U.S. portfolios, U.S. investors do not participate in the primary market for such bonds. Therefore, the primary market is dominated by foreign investors.
2. Yankee bonds
Yankee bonds are another type of dollar-denominated bonds. However, unlike the Eurodollar bonds, the Yankee bonds’ target market is within the U.S. These bonds are issued by a foreign company or country that has registered with the Securities and Exchange Commission (SEC). Since Yankee bonds are meant to be purchased by U.S. citizens in the primary market, they must follow regulations set by the SEC. For example, the company issuing the bond needs to be financially stable and capable of making payments throughout the period of the bond.
Non-dollar-denominated international bonds are all the issues denominated in currencies other than the dollar. Since there is currency volatility, U.S. investors face the question of whether to hedge their currency exposure. The different types of non-dollar-denominated bonds depend on the domicile of the issuer and the location of the primary trading market. The three major types are the domestic market, the foreign market, and the Euro market.
1. Domestic market
The domestic market includes bonds that are issued by a borrower in their home country using that country’s currency. Domestic markets have seen significant growth for several reasons. First of all, for companies, issuing debt in the domestic currency allows them to better match liabilities with assets. By doing so, they also don’t need to worry about the currency exchange risk. Also, by issuing debt in dollar-denominated markets and the domestic market, companies gain access to more investors. This allows them to obtain a better borrowing rate.
2. Foreign market
The foreign bond market includes the bonds that are sold in a country, using that country’s currency, but issued by a non-domestic borrower. For example, the Yankee bond market is the U.S. dollar version of this market. This is because they are sold in the U.S. using the dollar, but issued by a syndicate outside of the U.S. Other examples include the Samurai market and the Bulldog market. The Samurai market is Yen-denominated bonds issued in Japan but by non-Japanese borrowers. The Bulldog market is pound-denominated bonds issued in the U.K. by non-Brtish groups.
3. Euro market
Securities that are issued into the international market are called Eurobonds. This market encompasses all the bonds that are not issued in a domestic market and can be issued in any currency. Eurodollar bonds are an example of a U.S. dollar-denominated version of a Eurobond as they are sold in the international markets.
Most of the time, the bonds are written by an international syndicate and sold in several different national markets simultaneously. Issuers of Eurobonds include international corporations, supranational companies, and countries.
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