Global Bonds, Global Bond

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Global bonds are debt instruments that are issued simultaneously in several countries. These bonds are usually issued by large multinational organizations and sovereign entities, both of which regularly carry out large fund-raising exercises. By issuing global bonds, an issuing entity is able to attract funds from a vast set of investors and reduce its cost of borrowing. These bonds are specifically designed to be traded in any financial market.

Types of Global Bonds

Global bonds can be of three types:

  • Government bonds: These bonds are issued by the governments of various nations.

  • Brady government bonds: These bonds are backed by the US Department of Treasury, which guarantees repayment and significantly reduces default risk.

  • International corporate bonds: These bonds are issued by corporations headquartered outside the home country.
  • How do Global Bonds Work?

    Trading in global bonds is similar to that of regular bonds. However, unlike regular bonds, they can be issued in the domestic as well as in international currencies. The returns on global bonds could be impacted by fluctuations in the foreign currency market.

    Thus, when investing in global bonds, an investor must select a bond that is:

    • Issued in a stable currency, like the US dollar or the Euro, or opt for bonds in the domestic currency.
    • Issued from a country that has a stable government. Although bonds from countries with less stable government may offer higher yields, there is a higher risk of default.

    Benefits of Global Bonds

    Global bonds:

    • Help in diversifying an investment portfolio: Investment in global bonds helps reduce exposure to economic or political instability in a specific country and improves a portfolio’s risk profile. For instance, returns to a US investor who has invested in Japanese and European bonds will not be impacted by fluctuations in the US interest rates.
    • Improve the rate of return: Returns from global bonds are typically higher than returns offered by traditional government bonds and securities.

    Dangers of Global Bonds

    The risks associated with global bond investing are:

    • Capital gains can erode when an investor’s domestic currency appreciates vis-à-vis the currency in which the bond is issued.
    • The risk of the issuer defaulting on interest and principal payments is high due to the lack of government data on these bonds.
    • High taxes are levied on profits generated through these bonds. These taxes, at times, make global bonds unattractive.

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