An Overview of Foreign Bonds

The global market has shrank as technology has developed, making everything more interdependent.  In today’s economy, people should be aware of the events and opportunities with a view broader than that of national borders. One investment one should consider is buying foreign bonds of sovereign nations.

Foreign bonds are issued in a domestic market by a foreign entity, and are evaluated in the domestic market’s currency. Because these bonds are in a different nation with different rules, the risk is far greater than that of domestic investments.  Foreign bonds are known to offer potentially higher yields than US bonds, For example, the Chinese Bonds recently offered, “…three-year bills with a yield of 2.75 percent.”

Benefits of Foreign Bonds

Investing in a foreign market can offer much more return, as they have different regulation guidelines, a different point of the business cycle, and varying standards.  One would need to go through an insurance company, a broker or a bank to invest in such bonds, as well as convert currency to the one the bonds are sold in.  Many markets have promise for growth and development that allows for a greater return, but also greater risk.

Foreign Bond Risk

Foreign bonds carry a higher risk than domestic bonds.  Risks of international bonds are higher because of, “…varying stages of economic and political development, differing regulatory environments, trading days, and accounting standards.”  The reasons the bonds have more risk are also the reason for the greater return offered, so it is an inherent tradeoff of these bonds.

There are problems associated with the purchasing of non-dollar bonds.  One problem is that “the fund will not usually attempt to cushion the impact of foreign currency fluctuations on the dollar,” and thus is sensitive to the dollar.  So any fluctuation in the foreign currency before it is transferred back to American dollars, or any fluctuation in the dollar before it is transferred back, adds additional risk.

Buying Foreign Bonds

For someone to purchase these foreign bonds, one would have to go through an investing firm.  From online searches, T. Rowe Price offers the sale of and information for foreign bonds, as well as many other investment options ().  Anyone interested in more information on foreign bonds and purchasing them can easily find a site online.