An international bond is a bond that is sold outside the country of the borrower.

There are two types of international bonds: foreign bonds and Eurobonds. Foreign bonds are sold by foreign borrowers in the currency of the country in which the bonds are issued. An example would be German auto manufacturer, Porsche selling dollar denominated bonds in the US. Eurobonds, on the other hand are bonds that are issued in one country, but in the currency of a different country. An example would be German auto manufacturer, Porsche selling euro denominated bonds in the US. Eurobonds, when compared to the US domestic bond market have lower levels of disclosure requirements and therefore lower transaction costs. Investors preferring anonymity for either privacy or tax avoidance should choose Eurobonds. Taxes on interest payments are usually not withheld by governments. The most popular Eurobonds are bonds denominated in US Dollars, Japanese Yen or European Euros. No longer are international bonds being issued solely by multinational firms, international financial institutions, or national governments; they are now being issued also by domestic US firms attracted to their lower debt costs.

From an investor standpoint, besides anonymity and tax benefits, international bonds provide diversification, preservation of wealth, and attractive returns. International bonds can help hedge against the volatility and risks present in other asset classes while providing all the advantages of diversification in a portfolio. Although, yields may be correlated to the global business cycle, they are frequently determined by local and regional macro-economic factors. The best strategy is to invest in bonds at different stages of the economic and interest rate cycle. Having an allocation of international bonds reduces overall risk and volatility when compared to a portfolio comprised of only a domestic bond allocation. As with all bonds, international bonds provide a steady stream of fixed income and potential for capital gains, but they also pose a risk that the issuer will default. It is important that investors conduct an individual country and credit analysis prior to investing in international bonds.

Sources:

PIMCO bond basics. (2007, December). Retrieved from http://media.pimco-global.com/pdfs/pdf_sg/Global%20Bond%20Basics_12-07_A...

Brigham, E.F. & Ehrhardt, M.C. (2008). International money and capital markets. Financial Management: Theory and Practice (pp. 950-951). Mason, OH: Thom