International Bond
Candlefocus EditorLike all bonds, international bonds are subject to the same basics: credit risk (when the issuer will not pay back principle and interest) and interest-rate risk (when rising market interest rates decrease bond value). But international bonds provide added risk because investors may be exposed to currency fluctuations. That is, when a bond is denominated in a foreign currency, the investor can face volatility in returns due to changes in the exchange rate between the foreign currency and their own currency.
The potential rewards of investing in international bonds come from specifically giving an investor exposure to a different country, economy and foreign exchange rates. An international bond issuer’s bond may offer higher yields in certain foreign countries versus those of a local issuer. By investing in these debt securities, investors can benefit from more attractive yields as well as potentially good capital appreciation. International bonds can also provide increased portfolio diversification due to their different economic sensitivities than what are usually found in domestic bonds.
On the downside, international bonds may suffer from liquidity constraints compared to domestic bonds. The bond market outside of the investor’s own country may be significantly less liquid and trades in these securities may take days to complete, or might just not occur at all. Additionally, poor issuer creditworthiness can present a significant risk. When considering the additional risk factors associated with an international bond, investors should give due consideration to their overall financial goals and expectations before committing to any investment.
Overall, investing in international bonds can provide investors with many distinct advantages, including diversification, higher potential yields, and potential growth in value. However, they also come with an added layer of risk by subjecting investors to currency fluctuations and market liquidity risks. Investors should take great care in researching the various offerings when deciding whether international bonds are suitable for their portfolio.