Investing in Foreign Bonds

In: Business and Management

Submitted By kyatskovich
Words 329
Pages 2
Foreign bonds are debt securities issued in a domestic market by foreign borrowers, which are private corporations and financial institutions, central governments and their agencies, local and municipal governments, and international organizations. These bonds are denominated in the domestic market’s currency. As an example, a bond denominated in U.S. dollars that is issued in the United States by the government of Canada is a foreign bond. The asset class of foreign bonds also includes bonds of foreign entities that were originally issued abroad in their own native currency. Similar to the international equity markets, investing in foreign bonds offers multiple potential benefits, including higher returns and diversification possibilities for any investment portfolio. Proper international diversification can help take advantage of growth rates in different regions and countries and balance out returns by reducing or avoiding losses when the U.S. markets are underperforming. Although the U.S. bond market is the largest in the world, it was the top-performing market only twice in the last 15 years. Many investors find international debt securities especially attractive because they can add some of the world’s best-performing bond markets to their portfolios. Foreign bonds provide risk reduction due to the low correlation they have with any other asset class and with each other. The correlations of many assets rose sharply during 2005–2009, but foreign bonds have maintained their historically low correlations to all other assets, with a few exceptions. For example, the correlation between U.S. and foreign bonds was 0.35 during 1985–1999 and was still just 0.48 during January 2000–October 2007, but it jumped to 0.79 during the crisis. The correlation for TIPS and foreign bonds has been rising for the past 10 years. Historical…...

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