Issuer Raises Capital
A foreign government, company or other organization issues debt to raise capital under specified bond terms.
INTERNATIONAL BONDS
International Bonds Explained What U.S. Investors Should Know
International bonds can give U.S. investors access to fixed-income opportunities outside the United States. Learn how they work, where returns come from, and how currency, country, credit and interest-rate risks can affect an investment.
Global Fixed Income
Currency Exposure
Portfolio Diversification
Global Rates
Yield
Currency
UNDERSTANDING GLOBAL FIXED INCOME
What are international bonds?
International bonds are debt securities issued outside the United States by governments, companies, financial institutions or other eligible organizations. Depending on the security, the bond may be denominated in U.S. dollars or in a foreign currency.
For a U.S. investor, international bonds can provide exposure to economies, interest-rate environments and credit markets that may differ from those available in the domestic bond market.
That additional exposure can broaden an investment portfolio, but it also introduces risks that investors need to understand before purchasing a foreign debt security.
Global exposure changes the risk equation
Returns can be influenced by both the bond itself and conditions in the country or currency where the investment is based.
HOW THEY WORK
International bonds follow familiar fixed-income principles.
The basic relationship between the issuer and investor is similar to other bonds, but cross-border investing can add additional variables.
Investor Provides Capital
Investors purchase the bond and provide capital in exchange for scheduled payments according to the security's terms.
Interest Is Paid
Depending on the bond, investors may receive periodic interest payments during the life of the security.
Principal Is Repaid
If the issuer meets its obligations, the bond's principal is generally scheduled for repayment at maturity.
COMMON INTERNATIONAL BOND EXPOSURES
Global bonds can provide exposure to different markets and currencies.
The source of international exposure matters because each structure can behave differently for a U.S.-based investor.
01
Foreign Government Bonds
These securities are issued by national governments outside the United States. Their credit characteristics can be influenced by fiscal conditions, monetary policy, economic growth and political developments.
02
International Corporate Bonds
Companies outside the United States may issue bonds to finance operations, expansion or other corporate needs. Credit risk depends on the individual issuer and its financial condition.
03
Global Bond Funds and ETFs
Funds and ETFs can provide diversified exposure to international fixed-income markets without requiring an investor to select every individual foreign bond.
CURRENCY RISK
Exchange rates can change the return for a U.S. investor.
Currency exposure is one of the most important differences between many international bonds and comparable U.S. dollar investments.
If a bond is denominated in a foreign currency, changes in the exchange rate between that currency and the U.S. dollar can increase or reduce the investment's value when measured in dollars.
This means an international bond can have a positive local-currency return while producing a weaker result after the currency movement is translated into U.S. dollars.
Simple example
A foreign bond may rise in its local market, but a decline in that currency against the U.S. dollar can reduce the dollar value of the investment.
$
FX
USD
EUR
JPY
GBP
GLOBAL FIXED INCOME
Look beyond the bond's yield before evaluating an international investment.
A higher stated yield does not automatically mean a better investment. U.S. investors should consider the relationship between yield, credit quality, maturity, currency exposure, liquidity and market conditions.
Looking at these factors together can provide a more complete view of the potential opportunity and risk.
Credit quality
Currency exposure
Interest-rate environment
KEY RISKS FOR U.S. INVESTORS
International bonds add another layer of risk.
Global exposure can broaden a portfolio, but investors should understand the additional risks that can affect prices, income and total returns.
Currency Risk
Foreign-currency movements can increase or reduce the dollar value of interest payments and principal.
Country Risk
Economic, political and regulatory conditions in another country can affect the value and repayment prospects of a bond.
Credit Risk
The issuer may face financial problems that affect its ability to make interest or principal payments.
Interest-Rate Risk
Changes in local and global interest rates can affect bond prices, particularly when securities are sold before maturity.
Liquidity Risk
Some international securities may trade less frequently, potentially making transactions more difficult or costly.
Political Risk
Government policy changes, political instability or regulatory developments can influence foreign financial markets.
U.S. BONDS VS INTERNATIONAL BONDS
The biggest difference is the source of exposure.
Both can provide fixed-income exposure, but international bonds may introduce currencies, foreign economies and country-specific risks.
Factor
U.S. Bonds
International Bonds
Market Exposure
Primarily U.S. markets
Markets outside the United States
Currency
Generally U.S. dollar
May involve foreign currencies
Country Risk
Primarily U.S. economic and policy environment
Can involve multiple foreign countries
Interest Rates
U.S. rate environment
May reflect multiple rate environments
Additional Consideration
Domestic credit and liquidity factors
Currency, political and cross-border factors
BEFORE INVESTING
Questions U.S. investors can ask before buying an international bond.
A structured review can help investors understand what they are actually buying and which risks may affect the investment.
Who Is the Issuer?
Understand whether the issuer is a government, corporation, financial institution or another organization.
What Currency Is Used?
Determine whether the bond is denominated in U.S. dollars or a foreign currency and understand the resulting FX exposure.
What Is the Maturity?
Review when the principal is scheduled to be repaid and whether that timeframe matches the investment objective.
What Supports Repayment?
Consider the issuer's financial strength and the specific sources supporting interest and principal payments.
How Liquid Is It?
Consider trading activity and whether selling before maturity could be difficult or result in an unfavorable price.
What Are the Costs?
Review applicable fees, spreads, fund expenses or other costs that may affect the overall investment result.
PORTFOLIO DIVERSIFICATION
International bonds can add global diversification.
A portfolio concentrated in one country or interest-rate environment may behave differently from a portfolio with broader geographic exposure.
International bonds may give investors access to different economic cycles, monetary policies and credit markets. However, diversification does not eliminate investment risk, and global exposure can introduce additional sources of volatility.
GLOBAL
FIXED INCOME
DIVERSIFICATION
U.S.
Europe
Asia
Global
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FREQUENTLY ASKED QUESTIONS
Common questions about international bonds.
International bonds are debt securities issued outside the United States by governments, companies, financial institutions or other organizations. They may be denominated in U.S. dollars or foreign currencies.
International bonds can provide exposure to foreign economies, interest-rate environments and credit markets, which may help diversify a broader fixed-income allocation.
Currency risk is the possibility that changes in the exchange rate between the U.S. dollar and a foreign currency affect the dollar value of an investment and its payments.
Not necessarily in every case, but international bonds can involve additional risks such as foreign-currency movements, country risk, political risk and different regulatory or market conditions.
Yes. Some international bonds are issued in U.S. dollars. Dollar denomination can reduce direct currency exposure from the bond's principal and interest payments, although other international risks can still remain.
Review the issuer, currency, maturity, credit quality, yield, liquidity, fees, country exposure and other terms of the security. Understanding these factors can help you assess the investment more completely.
EXPLORE INVESTING
Understand more before making your next investment decision.
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