The international bond market can be defined as the market that consists of all bonds which are sold by issuing companies, or governments outside their own nation. Granting bonds internationally is an exceedingly popular way of getting new funding for prospective projects. Most common purchasers of international bonds are pension funds, large banks, mutual funds, and governments with ample financial reserves. Companies such as Morgan Stanley, and JP Morgan Chase, are the typical managers who are employed through corporate and government clients to manage their sales of new international bonds.
There are two different International Bonds (which are discussed below) that are the most used in today’s international bond marketplace. These are those bonds called, “Eurobonds” and “foreign bonds”. A Eurobond is simply a bond issued outside the nation in whose currency, the bond is denominated in. To illustrate further, a bond issued by a Chilean company, denominated in Canadian dollars, and sold in Germany, France, Britain, and Luxembourg, (but not in Canada), is a Eurobond. Because this bond is denominated in Canadian dollars, the Chilean borrower will receive the loan, and thus make payments in Canadian dollars. Eurobonds are by far the most used today, accounting for some 80% of the international bonds in circulation. Those nations in which these bonds are sold do not regulate them, which reduce the cost of issuing the bond over the short run. A foreign bond is sold outside the borrower’s home country, and denominated in the currency of the nation in which it is being sold in. To appositely illustrate, a Canadian dollar denominated bond issued by the Italian car maker Lamborghini, in Canada’s domestic bond market is known as a foreign bond. They account for roughly 20-25% of all international bonds. These bonds are subject to the same regulations imposed on domestic bonds.
Impact of interest rates on International bonds
Low interest rates today, i.e. the cost of borrowing, are initiating and spurting growth in the international bond market. These lower interest rates, especially those in developed countries, are resulting from low inflation levels, as well those domestic bonds issued by their government or a bond supplier, earn little interest. There are a handful of banks, and mutual funds, searching out higher returns in the new developing countries, where the higher interest returned will reflect the increased risk of doing business in these countries. Corporations and government in these developing nations, need this inflow of investment, in order to support government works programs and domestic business development and expansion. But be careful, to watch for when the nations demand for money overwhelms supply, thus increasing interest rates in these markets.
Important to know:
(A) By issuing bonds into the international bond market, borrowers from developing nations will be able to borrow money from other countries where there interest rates may be lower.
(B) Investors in developed countries purchase bonds in developing countries, in order to gather higher returns on their investment.