Takeaways
- Foreign governments and entities issue international government bonds.
- Institutional and retail fixed-income investors flock to international bonds.
- Emerging government bonds command higher yields because they are risky.
- Investors can buy international government bonds via online brokerage accounts.
- New and developing countries issue bonds to build infrastructure, fund public services, and pay for government operations.
What Is an International Government Bond?
An international government bond is a debt security issued by foreign governments and is one of the largest asset classes in the world. These bonds allow governments to raise capital for public projects or to manage their national debt effectively.
When you purchase an international government bond, you lend your money to a foreign country. In return, that government agrees to pay you:
- Periodic interest payments, known as coupon payments, and;
- Principal investment, after the bond matures
International government bonds are frequently issued by both developed and emerging economies. Individual bonds can be purchased through bond brokers and brokerages. They are sold during market hours on some of the largest secondary domestic and global bond markets.
Smart Tip:
International bonds comprise 52% of the global fixed-income market and 24% of the worldwide capital markets.[1]
International government bonds are denominated in the issuing country’s currency or the U.S. dollar, the most widely accepted currency in global trade. The U.S. dollar is the world’s reserve currency since the late 1940s.[2]
Institutional funds (like pension, hedge, and endowment funds) and retail investors use international government bonds to inject diversity into their portfolios. These bonds add multiple elements of diversity and risk, including geographic diversity, because you gain exposure to new foreign economies, interest rate environments, and geopolitical structures substantially decoupled from the U.S. bond market.
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How International Government Bonds Work
International government bonds work very similarly to domestic Treasury or municipal bonds. When a foreign government decides to issue a bond, it first sets the bond terms, including the interest rate, maturity date, and principal amount.
These bonds are usually offered to the public through government websites or debt offerings. Investors then purchase the bonds for face value, expecting regular, periodic payments until the bond matures. Bond interest payments are typically made annually or semi-annually, and once the bond matures, the principal is returned to the bondholder.
The interest payments vary depending on the bond’s interest payment structure. Bonds can have a fixed or floating or fixed interest rate. Here’s how they work:
- Floating rate bonds are tied to market conditions in the issuing country, which can cause payments to fluctuate over the bond's lifetime.
- Fixed-rate bonds offer a more predictable payment schedule and coupon rate.
A range of factors heavily influences international government bonds. These can include the credit rating of the issuing country, prevailing interest rates in that nation, and the overall economic stability of the region. The currency in which the bond is denominated can also impact payment and currency fluctuations, increasing the complexity of the investment.
Smart Tip:
The U.S. Department of Treasury issues U.S. government bonds, T-Bills, and other debt securities.
What International Government Bonds Fund
International governments issue bonds for a wide range of government expenses. The capital raised through bond issuances often supports the following:
- Public infrastructure projects like roads, bridges, and hospitals
- Education programs such as public schools, colleges, and universities
- Social initiatives that provide a financial safety net
- Environmental projects aimed at national sustainability
- Managing national debt or refinancing its current debt load
Governments in emerging economies often use bond issuance to attract foreign investment and in turn use the newly raised money for economic development or to stabilize their national financial systems.
Government bonds also serve as a crucial financial tool for countries that need emergency funding during economic crises (think natural disasters). International bonds give foreign governments a flexible method to finance short-term and long-term projects, help stabilize and grow their economies, and attract foreign investment.
How to Buy International Government Bonds
There are multiple ways to purchase international government bonds depending on the market where bonds are issued.
The common way to purchase them is through your online brokerage firm where you might already have an investment portfolio. Most online brokerage platforms offer access to foreign bonds. For easy-to-use platforms like E*Trade, Fidelity, or Robinhood, you can purchase international bonds like any other investment security (stocks, REITs, corporate bonds).
Overview of Purchase Options
With access to purchase these bonds, you can decide how to gain exposure to them, directly or via a bond fund. Here is how most investors buy international government bonds:
- Individual Bonds: Investors can purchase newly issued or secondary individual bonds on their brokerage account, much like buying an individual stock. Companies list their available-for-sale bonds, and rating agencies, like Standard & Poor's, issue credit ratings to assess the bond's quality. (Read more about how the Standard & Poor’s credit ratings work).
- Bond Mutual Funds: These funds pool money together to have a portfolio manager actively manage purchased international bonds. Bond mutual funds trade only trade that the end of the trading day. (Read more about bond mutual funds).
- Bond Exchange-Traded Funds: Bond ETFs are baskets of bond investments that investors can trade into and out of daily on major stock exchanges. (Read more about Bond ETFs).
Key Bond Investment Considerations
You must thoroughly understand a few investment variables before pulling the trigger to invest in international government bonds. Here are a couple to keep in mind:
- Currency Denomination: Each bond issuance is denominated in a base currency. Sovereign bonds, or bonds issued by a country's national government, are typically denominated in that country's currency. These countries can issue bonds outside their country, usually denominated in the U.S. dollar or the Euro.
- Bond Rating: Credit rating agencies like Standard & Poor's, Moody's, and Fitch provide investors with an assessment of the issuing country's ability to pay interest payments on time and in full. Bonds with AAA ratings are considered the safest investment. (Read more about the credit rating agencies).
- Country’s Creditworthiness: Much like credit card companies provide a credit score based on your credit history, countries also have a creditworthiness that investors assess. Countries that have paid their bonds on time and in full (without defaults) usually command lower interest rates from investors. (Read more about how annual percentage yield (APY) works).
- Tax Implications: At the end of the tax year, you will own a tax liability or receive a tax refund. The tax implications of international government bonds depend on what countries issue the bonds, your investment gains and losses, the timing of transactions, and other elements of your finances. (Read more about how to file your taxes).
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Pros of International Government Bonds
Bond investors must choose what type of bond they want to invest in. International government bonds offer a variety of advantages over other bonds. Here are several to consider before choosing your next investment:
- Diversification: Bonds offer a whole suite of diversification benefits, including geographic, geopolitical, credit, and interest rate risks. Investors looking to juice their bond or fixed-income portfolio might find the perfect individual bond or bond fund to slot into their holdings.
- High-Yield Investments: Not all international bonds are created equal. Emerging market bonds are known for their high yields and corresponding risk profile. These bonds have a lower credit rating than investment-grade U.S. bonds and, as a result, must compensate investors for assuming an increased credit risk.
- Builds Passive Income: Every well-balanced investment portfolio should have exposure to bonds. This is particularly true if you are building a passive income portfolio. Many financial experts will advise clients nearing retirement to be more conservative with 401(k), Roth IRA, or Traditional IRA investments. Coupons, or interest payments, compensate bondholders and act as a source of reliable interest income.
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Cons of International Government Bonds
Every investment involves a certain degree of risk. Your job as an investor is to calibrate your portfolio with investments that fit your risk appetite. Here are several reasons international government bonds might not be the best fit for you:
- Currency Risk: If the bond you invest in is denominated in a foreign currency that experiences runaway inflation or weakens against the U.S. dollar, the value of your investment could plummet quickly. As a result, your principal investment and regularly scheduled coupon payments wouldn’t be worth as much and erode your return on investment.
- Economic Risk: Mismanagement of financial ecosystems can lead to coupon and principal defaults, causing swift and sudden drops in bond values.
- Political Risk: Unstable countries issuing bond payments to clean up a disastrous debt situation can generate political upheaval can negatively affect bond prices.
- Conservative Investing: Personal finance experts advocate for beginner investors to start investing in stocks over bonds. While bonds can be easy to invest in, they have not provided the same returns as investments in stocks or index funds like the S&P 500 or DJIA.
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Smart Summary
International government bonds are interest-bearing debt securities issued by foreign governments. These securities allow governments to fund projects and social programs and manage national debt. Fixed-income investors like investing in international bonds because they have higher yields and add diversity to their investment portfolio. You can purchase international government bonds through most major brokerage accounts.
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(1) Vanguard. Revalidating the Case for International Bonds. Last Accessed January 13, 2025.
(2) Council on Foreign Affairs. The Dollar: The World’s Reserve Currency. Last Accessed January 13, 2025.
