Everything to Know About the International Bond Market

According to ICMA estimates, the international bond market was worth approximately $128.3 trillion in notional outstanding (USD equivalent) as of August 2020. It is a dynamic market with several types of bond issuance, such as domestic bonds, Eurobonds and foreign bonds. 

While they may offer portfolio diversification, better yields and more fixed income opportunities, they also carry risks for investors. Dive in to explore what the international bond market is, its types, risks and more.

Quick Overview 

• Some popular instruments are like straight income bonds, FRNs, convertible bonds and more.  
• In 2024, corporate bond issuance surged 30.6% year-over-year, reaching $2.0 trillion, whereas municipal bond issuance surged 33.2% year-over-year, reaching $513.6 billion in worth. 
• With 12,000 issuers from 130 countries, the Eurobond market has become the 3rd biggest debt market in the world. 

What is the International Bond Market? 

The international bond market refers to bonds issued and traded across national borders, often in foreign currencies. Interestingly, although public sector bonds make up over two-thirds of the global bond market's capitalisation, governments rarely tap into the international bond market. 

For most borrowers, even those active internationally, the majority of transactions could still be carried out within their own domestic bond markets.

Components of International Bond Market 

Domestic Bonds

Domestic borrowers issue domestic bonds within the country. They are most often denominated in the nation's local currency. According to a source released in 2024, domestic bonds are the largest segment (approximately 70%) of the international bond market. 

A syndicate of domestic banks normally handles domestic bonds and sells them through a bidding system. The securities laws of the local country regulate them. 

Foreign Bonds

Foreign bonds are debt securities issued in a local market by foreign businesses, large corporations or governments and are denominated in the domestic currency. The primary objective of issuing foreign bonds is to tap into global capital markets and raise funds globally. 

Common types of foreign bonds are Yankee Bonds, Samurai Bonds, Matilda Bonds and Bulldog Bonds. Although they provide exposure to overseas markets and currencies, they also come with risks such as floating exchange rates and geopolitical instability.

Eurobonds

Eurobonds, international debt securities, are issued with the help of a multinational group of banks and primarily sold in places outside the country whose currency they are issued in. Similar to domestic bonds, investors can not buy and sell Eurobonds in any single national bond market.

These bonds are sold using various procedures, except for the traditional bond issuing system. They include the FPRO, the bought deal, and the tender system. 

Most Popular Instruments in International Bond Market 

• Straight or fixed-income bonds
• Floating rate notes (FRNs)
• Partly paid bonds
• Perpetual FRNs
• Dual-currency bonds
• Bonds with warrants
• Convertible bonds

The Difference: International Bonds vs. Foreign Bonds 

Many investors use these terms interchangeably without realising that they are not the same.

Foreign bonds are issued in a local market by foreign entities or governments and denominated in the domestic currency. For instance, an American company that has business in Japan may issue a bond in Japan to raise long-term funds that is valued in Japanese Yen.

Foreign bonds are just one type of international bond. Other types of bonds, including domestic bonds and Eurobonds, fall under the broader category of international bonds. 

Risks Associated with Investing in International Bond Market 

By investing in international bonds, investors are prone to several risks, such as 

• Interest rate fluctuations
• Inflation
• Currency exchange rate volatility
• Geopolitical issues

So, it is advisable to do adequate research, stay updated about the latest rates and regulations and assess your financial priorities before considering the international bond market for investing and generating higher yields.