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Foreign Bonds Explained: A Beginner’s Guide

Imagine you’re an Indian investor looking to explore options beyond the domestic market. You’ve already got some mutual funds, stocks, and maybe even fixed deposits. Now you’re wondering, “How can I tap into international opportunities?”

That’s come in. When a company or government wants to raise funds outside its own country, it often issues bonds in a foreign currency. For investors like you, this opens the door to global markets, possibly better returns, and a more diversified portfolio.

But—it’s not all smooth sailing. There are risks associated with these bonds, such as currency movements, political instability, and regulations that may be different. Realising these things before investing in them can help to understand how they work and what to look out for.

What Are Foreign Bonds and How Do They Work?

Foreign bonds are loans raised by a company or government from another country, but in the local currency of the country where they’re issued. For example, a Japanese company that wants to raise money in India can issue bonds in Indian Rupees. A US company might do the same in Japan using Japanese Yen. It's like borrowing money abroad, but in the local currency!

These bonds allow foreign issuers to raise capital from local investors while giving those investors a chance to participate in foreign markets without the complexities of direct overseas investment. Thanks to a regulated and user-friendly bond investment platform like Bondbazaar, Indian investors can easily buy, sell, and track foreign currency bonds from their homes.

Top Benefits of Foreign Bonds for Indian Investors

Foreign currency bonds offer several advantages for investors looking to diversify and enhance their portfolios:

  • Diversification Beyond Borders: Investing in foreign bonds lets you spread your risk across different economies and currencies, reducing dependence on the Indian market alone.
  • Attractive Interest Rates: Foreign issuers often offer higher coupon rates than domestic bonds. For instance, Indian government bonds typically have lower interest rates, so a foreign bond with a strong credit rating offering higher yields can be appealing.
  • Access to Global Growth: By investing in foreign currency bonds, you gain exposure to the growth potential of other countries’ economies and industries.
  • Convenience and Transparency: Platforms like Bondbazaar provide an easy-to-use, SEBI-regulated environment where you can access thousands of bonds, including foreign currency bonds, with real-time trading and zero brokerage fees.

At the same time, foreign issuers benefit by raising capital at competitive rates in markets like India, often at lower interest costs than in their home countries.

Types of Foreign Bonds

Foreign bonds come in different types, depending on where they’re issued and in what currency. Here are a few common ones you might come across:

1. Yankee Bonds

These are bonds issued by foreign companies in the US but in US Dollars. So, for example, a European company might issue Yankee bonds to raise money from American investors. The issuer must follow US financial rules. These bonds can offer higher returns to investors, while issuers often get to borrow at lower interest rates than they would in their own country.

2. Samurai Bonds

These are yen-denominated bonds issued in Japan by foreign companies or governments. So, if a Canadian company wants to tap into Japan’s market, it can issue Samurai bonds. The big plus? Japan’s interest rates are often low, which makes borrowing cheaper. These bonds can run anywhere from 3 to 20 years and must follow Japanese regulations. Issuers can also convert the money raised into their own currency and use it at home.

3. Bulldog Bonds

Issued in the UK by non-British companies, Bulldog bonds are denominated in British pounds. These allow foreign businesses to raise funds from British investors. They’re only available in the UK market and can have a maturity of 5 to 25 years. Companies usually offer attractive interest rates to make these bonds appealing.

In short, these bonds let foreign entities raise money in local markets while giving investors access to international opportunities.

What Are the Risks of Investing in Foreign Currency Bonds?

Investing in foreign currency bonds can be rewarding, but there are a few risks you should know about.

Currency Risk

When you invest in bonds in a foreign currency, changes in exchange rates can affect your earnings. For example, if an Indian company issues bonds in US Dollars and the Rupee becomes weaker, you get more money when you convert Dollars back to Rupees. But if the Rupee becomes stronger, you get less. So, currency changes can increase or decrease your final returns when you bring the money back to your own currency.

Credit Risk

This is the risk that the bond issuer might not pay you back. If the company or government faces financial trouble or the economy in their country takes a hit, they might miss interest or principal payments. So, always check the issuer’s credit rating and their country's economic situation.

Interest Rate Risk

If you buy a bond with a fixed interest rate and global rates increase, new bonds offer better returns than yours. This can make your bond less valuable if you try to sell it before it matures.

Political Risk

Politics can play a big role. Instability, unrest, or sudden policy changes in the issuer’s country could affect your returns or delay payments. That’s why looking into the political climate before investing is smart.

Inflation Risk

Rising inflation eats into your real returns. For instance, if your bond pays 5% but inflation is 4%, your actual gain is only 1%. Inflation levels can vary from country to country, so it’s something to keep an eye on with foreign bonds.

Tip: Many investors manage these risks by spreading their money across different countries and currencies or using strategies to protect against currency swings (called hedging).

Things to Consider When Investing in Foreign Bonds 

Here are a few things to consider when investing in foreign currency bonds:

  • Interest Rate: As with any fixed-income instrument, bonds also have an inverse relationship between yield and price. As the interest rate rises, the existing bond’s price decreases. 
  • Credit Quality: Accounting standards vary by country, making it difficult to assess an issuing entity's financial health. Before investing, one must check the bond and the issuer's credit rating. 
  • Liquidity: The size of the IPO and the issuance market often affect a bond's liquidity, making it accessible when needed. 
  • Price Transparency: Since the secondary market is available over the counter, the bond's price should be transparent, allowing investors to determine the investment's fair market value.

Conclusion

Foreign currency bonds provide Indian investors a valuable opportunity to diversify their portfolios, access higher yields, and participate in global markets. However, they come with additional risks, such as currency fluctuations, credit concerns, and political factors, that require careful consideration.

By researching thoroughly and using a reliable bond investment platform such as Bondbazaar, you can navigate these complexities and build a diversified portfolio that aligns with your financial goals. With access to a wide range of bonds, transparent pricing, and expert guidance, you can confidently explore the benefits of foreign currency bonds while managing the associated risks.

Frequently Asked Questions

1. Can Indian investors buy foreign currency bonds?

Yes, Indian investors can invest in foreign currency bonds, but they must follow the rules set by the RBI and FEMA. Bondbazaar helps investors explore these bonds. 

2. Are foreign bonds safe?

The safety of foreign bonds depends on who is offering them and the stability of their country. Government bonds from strong, stable countries are usually safer. Bonds from foreign companies can be riskier. Changes in currency value can also affect how much you earn, adding another risk to think about.

3. What is the difference between foreign bonds and Eurobonds?

Foreign bonds are issued by a foreign company in a specific country’s market and in that country’s currency. They follow local regulations. Eurobonds are issued internationally, outside the issuer’s home country. They are usually in a foreign currency and face fewer regulations, offering more flexibility and wider access for both issuers and investors.