February 19, 2025
5 mins read
Foreign bonds are those bonds that are issued by a foreign entity in an investor’s local market in its local currency. An example of foreign bonds can be a French company Read more...issuing US Dollar-denominated bonds in the US market for American investors.
Foreign bonds help investors diversify their portfolios. They can also help investors earn a higher interest rate than prevailing in their own country. Meanwhile, such bonds can enable foreign entities to raise capital for their operations. They can also help them access finance at a relatively low interest rate. The most popular types of foreign bonds are Samurai Bonds, Bulldog Bonds, and Yankee Bonds. Read less
All kinds of entities, whether private companies or governments, need capital to finance their operations. Over the years, foreign bonds have emerged as a popular way to raise capital for many entities around the world. In this blog, we will learn what foreign bonds are, the types of foreign bonds, and many other aspects related to them. So, read on…
Foreign bonds means bonds issued in a country’s domestic market by foreign entities, which can be a government agency or a company, in the currency of the domestic market.
Such bonds help foreign entities raise funds, besides enabling local investors to gain foreign exposure. Moreover, since foreign bonds trade on local exchanges, local investors find it easy to invest in them and track their investments. Having learnt what foreign bonds are, let us delve deeper into this topic.
The most prominent types of foreign bonds are explained below:
Samurai Bonds: These bonds are issued in Japan by institutions from outside of Japan. Samurai bonds are yen-denominated; they are often issued to capitalize on low interest rates prevailing in Japan or to get access to Japanese investors. The maturity of Samurai bonds can range from 3 to 20 years. The issuers have to follow the Japanese regulations to raise capital from these bonds. Often, foreign companies use Samurai Bonds to raise funds to invest in the Japanese market. Moreover, the issuers are also allowed to convert the funds raised through these bonds into their native currency and invest the same in their own country.
Bulldog Bonds: It is a type of bond that is used by non-British issuers to raise funds in pound-sterling from British investors. A non-British entity may use Bulldog Bonds to raise capital when it needs finance in pound-sterling or when it requires funds at an attractive rate of interest. These bonds are named after the British Bulldog, which is a national icon in England.
Yankee Bonds: Yankee Bonds are US Dollar-denominated bonds that are issued in the US by foreign issuers, like banks, governments, and corporations. As such bonds trade in the US market, they have to follow US securities laws. Yankee Bonds often offer a win-win to both the issuers and the investors. By investing in them, the investors are able to earn a comparatively higher yield than they earn otherwise. The issuers can use these bonds to raise finance at a lower interest rate than prevailing in their own countries.
Additional Read: What are the Types of Foreign Exchange Markets?
Foreign bonds tend to have a lot of potential for investors and issuing entities. Because such bonds are raised by foreign entities located outside of a domestic market, they help investors reap the benefits of portfolio diversification.
Foreign bonds can also help investors earn a higher interest rate than prevailing in their own countries. For example, Japan is known for having extremely low interest rates. Hence, if a foreign company with a good credit rating offers a higher interest rate to Japanese investors through such bonds, then it may make sense to invest in them.
Similarly, foreign bonds offer benefits to issuing entities as well. For example, foreign corporations can benefit from low prevailing interest rates in countries like the US, the UK, and Japan to raise finance. That said, they have to follow regulations in these countries to raise capital through this route.
Additional Read: How to Buy Bonds
While foreign bonds have many benefits, they also have the following risks, which the issuers and the investors should be mindful of:
Political Risk: Foreign bonds can expose investors to political risk, especially when they are issued by a foreign government. Hence, before investing in them, you should check whether the government issuing them is stable or not. You must also know beforehand about the court system in case some issues crop up in the future. It can also happen that the foreign government raising finance through foreign bonds does not have enough funds to repay them. So, do read about the financial situation of the issuing government.
Currency Risk: When a foreign entity issues bonds in the currency of another country, it takes currency risk. Consider an Indian company raising foreign bonds denominated in the US Dollar. When it converts the interest payable on such bonds from USD to Indian Rupees (INR), it takes a currency risk because INR can depreciate against USD.
Interest Rate Risk: Foreign bonds can expose investors to interest rate risk as well. Suppose an investor invests in a 5-year foreign bond at a 6% interest rate. However, after a year, he realises that the interest rate has increased to 7%. As a result, no one will invest in the bond without a price cut to compensate for the difference in interest rates.
Inflation Risk: Most bond investments come with an inflation risk. Suppose a foreign bond offers you a 5% per annum interest rate when the inflation is 3%. Hence, your post-inflation yield is 2%. But, if inflation increases to 4%, your post-inflation yield will fall to 1%.
Additional Read: What is Foreign Direct Investment?
Foreign bonds offer benefits to investors and issuing entities both. However, you need to do your homework before investing in them because they can be more complex than local bonds. The very fact that foreign bonds are issued by entities outside a local investor’s country makes them a complex instrument.
This makes it necessary for you to understand the financial and political aspects related to foreign issuers. That said, such bonds do have their advantages. Hence, a diligent investor should assess their pros and cons before investing in them.
A foreign bond is issued by an entity outside of an investor’s domestic market. However, a domestic bond is issued by an issuer from an investor’s own country.
Factors like the issuer’s credit rating, maturity date, inflation expectations, currency rate dynamics, and political risk affect the pricing of foreign bonds.
Investors can hedge currency risk in foreign bonds using forward contracts, options, currency ETFs, or investing in hedged bond funds to protect against exchange rate fluctuations and maintain stable returns.
Investing in foreign bonds may attract capital gains tax, withholding tax on interest, and currency exchange implications. Tax treaties and domestic laws impact taxation, so consulting a tax advisor is advisable.
Major economies like the United States, European nations, Japan, and emerging markets issue the most foreign bonds, attracting global investors seeking diversification and stable returns in international debt markets.
Credit ratings play an important role in foreign bonds. For example, foreign issuers that want to raise foreign bonds in the US market have to be rated by American credit rating agencies.
An investor needs to check factors like the credit rating & financial position of an issuer, interest rate, political stability of an issuer’s country, and expected inflation rate before investing in foreign bonds.
You can buy foreign bonds from India through authorised dealers, international brokerage platforms, or funds investing overseas, following RBI guidelines under Liberalised Remittance Scheme and completing required documentation.
Yes, you can invest in foreign bonds from India by using approved channels like global brokers or international funds, subject to regulatory limits and compliance with foreign investment guidelines.
Foreign bonds are debt instruments issued by a foreign entity in another country’s market and currency, where investors lend money and receive interest along with principal repayment at maturity.
Foreign bonds can be suitable if you seek diversification and global exposure, but they carry risks such as currency fluctuations, geopolitical uncertainty, and varying interest rate conditions across different economies
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This article is for educational purposes only and should not be considered investment advice. Market investments are subject to risks. DSIJ Wealth Advisory Private Limited is a SEBI-registered Research Analyst (Reg. No: INH000006396) and Investment Adviser (Reg. No: INA000001142). Please consult your financial adviser before investing.
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