The international bond market consists of all bonds sold by issuing companies, governments, or other organizations outside their own countries. Issuing bonds internationally is an increasingly popular way to obtain needed funding. Typical buyers include medium-sized to large banks, pension funds, mutual funds, and governments with excess financial reserves. Large international banks typically manage the sales of new international bond issues for corporate and government clients.
international bond market
Market consisting of all bonds sold by issuing companies, governments, or other organizations outside their own countries.
Types of International Bonds
One instrument used by companies to access the international bond market is called a Eurobond—a bond issued outside the country in whose currency it is denominated. In other words, a bond issued by a Venezuelan company, denominated in U.S. dollars, and sold in Britain, France, Germany, and the Netherlands (but not available in the United States or to its residents) is a Eurobond. Because this Eurobond is denominated in U.S. dollars, the Venezuelan borrower both receives the loan and makes its interest payments in dollars.
Bond issued outside the country in whose currency it is denominated.
Eurobonds are popular (accounting for 75 to 80 percent of all international bonds) because the governments of countries in which they are sold do not regulate them. The absence of regulation substantially reduces the cost of issuing a bond. Unfortunately, it increases its risk level—a fact that may discourage some potential investors. The traditional markets for Eurobonds are Europe and North America.
Companies also obtain financial resources by issuing so-called foreign bonds—bonds sold outside the borrower’s country and denominated in the currency of the country in which they are sold. For example, a yen-denominated bond issued by the German carmaker BMW in Japan’s domestic bond market is a foreign bond. Foreign bonds account for about 20 to 25 percent of all international bonds.
Bond sold outside the borrower’s country and denominated in the currency of the country in which it is sold.
Foreign bonds are subject to the same rules and regulations as the domestic bonds of the country in which they are issued. Countries typically require issuers to meet certain regulatory requirements and to disclose details about company activities, owners, and upper management. Thus BMW’s samurai bonds (the name for foreign bonds issued in Japan) would need to meet the same disclosure and other regulatory requirements that Toyota’s bonds in Japan must meet. Foreign bonds in the United States are called yankee bonds and those in the United Kingdom are called bulldog bonds. Foreign bonds issued and traded in Asia outside Japan (and normally denominated in dollars) are called dragon bonds.
Interest Rates: A Driving Force
Today, low interest rates (the cost of borrowing) are fueling growth in the international bond market. Low interest rates in developed nations are resulting from low levels of inflation, but also mean that investors earn little interest on bonds issued by governments and companies in domestic markets. Thus banks, pension funds, and mutual funds are seeking higher returns in the newly industrialized and developing nations, where higher interest payments reflect the greater risk of the bonds. At the same time, corporate and government borrowers in developing countries badly need capital to invest in corporate expansion plans and public works projects.
This situation raises an interesting question: How can investors who are seeking higher returns and borrowers who are seeking to pay lower interest rates both come out ahead? The answer, at least in part, lies in the international bond market:
■ By issuing bonds in the international bond market, borrowers from newly industrialized and developing countries can borrow money from other nations where interest rates are lower.
■ By the same token, investors in developed countries buy bonds in newly industrialized and developing nations in order to obtain higher returns on their investments (although they also accept greater risk).
Despite the attraction of the international bond market, many emerging markets see the need to develop their own national markets because of volatility in the global currency market. A currency whose value is rapidly declining can wreak havoc on companies that earn profits in, say, Indonesian rupiahs but must pay off debts in dollars. Why? A drop in a country’s currency forces borrowers to shell out more local currency to pay off the interest owed on bonds denominated in an unaffected currency.