Diversify Your Portfolio Beyond the U.S. Dollar

One distinct advantage we have at International Assets is our direct access to bond markets around the world. Many Investors overlook the fact that the global bond market is significantly larger than the global equity market. According to the Bank for International Settlements¹, the total global bond market (as of 2010) is valued at over $91 trillion and about $32 trillion of that is US debt. The World Federation of Exchanges² values total global equity markets at about $51 trillion and the US makes up about $17 trillion of that amount.

The United States used to represent a much larger share of global bond market activity but now many of those opportunities lie outside the country. Daily volume in bonds is also much larger than equities but since most of these trades are done at an institutional level, retail investors may be unaware of different opportunities available in this asset class.

The global bond trading desk at International Assets takes full advantage of their decades of experience and wealth of worldwide contacts.  Their service allows our clients to truly diversify their portfolios and often at far less cost than alternative methods.

Currencies Available at International Asset

Basics of Foreign Bonds

Like domestic bonds, foreign bonds represent a financial obligation of a government, supranational entity or corporation. The issuer promises to pay the buyer a specific amount, either through interest payments and/or a lump-sum payment at maturity. In exchange, the buyer essentially loans the issuer the principal amount for its use. Each foreign bond has a par value comprised of 1000 units of the currency it is denominated in. These bonds can trade at a value that is above (premium) or below (discount) their par value.

The two primary defining factors for foreign bonds are that interest and principal payments are denominated in a currency other than the US Dollar and that they are issued by a non-US organization.

 

The Key Characteristics of Foreign Bonds Are:

1. Issuer -This is the entity that receives the proceeds from the original bond offering and is responsible for the return of interest and principal.
2. Maturity Date – This is the date the principal is due to be repaid to bondholders along with the final interest payment.
3. Coupon – This is the stated interest rate on the bond.
4. Yield to Maturity (YTM) – Refers to the annual rate of return anticipated on a bond if it is held until the maturity date. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as “yield” for short.
5. Credit Rating – How a bond is rated by ratings agencies with regard to probability of timely interest payments and repayment of principal.
6. Currency – Currency in which interest and principal are paid.

Why Invest In Foreign Currency Bonds?

1. Diversify assets out of the US Dollar – Many investors feel the Dollar may eventually lose its status as the world’s reserve currency and are therefore looking for a way to get some of their portfolio holdings out of USD.
2. Earn potentially higher interest rates – Interest rate cycles can vary among countries so there may be higher rates available outside the Unites States.
3. Flexibility in portfolio management – Individual foreign bonds can offer more direct control over your assets.

What Are The Risks of Foreign Bonds?

1. Currency – This is perhaps the biggest risk. If the USD appreciates against the foreign currency the bond is denominated in, the bond’s value will decrease.
2. Interest Rate Risk – A rise in interest rates can cause a bonds value to fall.
3. Default – We focus almost exclusively on highly-rated bonds but there is always a chance that an issuer can default on interest and/or principal.

Our Process for Purchasing Foreign Currency Bonds

1. Establish a US-based brokerage account with our clearing firm, Pershing, LLC
2. Choose which currencies to invest in
3. Determine the most suitable issuers, maturities and yields
4. Convert currency and purchase bonds
5. Collect principal interest and principal in account. We can hold USD or foreign currencies in our accounts depending on client needs.

International disclaimer:
International investing involves additional risks such as currency fluctuations, differing financial and accounting standards, and possible political and economic instability. Also, investing in emerging markets can be riskier than investing in well-established foreign markets. There is no assurance any of the trends mentioned will continue in the future. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal.