Foreign bond investment

Foreign bonds - does it pay to invest in them?

The answer to such a question cannot be unambiguous because the category of foreign government bonds covers a wide range of quite diverse papers - from very risky ones, such as those of Ukraine or Venezuela (which can generate considerable profits), to very secure (but not profitable) such as Swiss or German papers.

Main risks of investing in foreign bonds

The main threats related to investments in foreign bonds include the issuer's credit risk, i. e. the issuer's ability to repay its debt. At present, bonds of developing countries such as Venezuela, Brazil and Nigeria bear the highest interest rates. Venezuelan annual bonds have the highest interest rates, and their yield is over 50 percent.

Among European countries, the highest annual bond yields are in Ukraine - 20 per cent - and in Russia and Greece - 10 per cent each. However, due to the difficult economic situation of these countries, there is a high risk of investing in these securities - in the event of a government's insolvency or debt restructuring, one can simply lose some or all of the money invested.

Liquidity risk when investing in foreign bonds 

For this type of investment, the liquidity risk must also be taken into account. It is a threat that if we have bonds, we will not be able to sell them at any time, in the expected amount and at a satisfactory price. Moreover, bonds are purchased in national currencies, which entails the risk of adverse changes in exchange rates.

Advantages of investment in foreign bonds

On the other hand, an unquestionable advantage of investment in foreign bonds is diversification of the investment portfolio. At a time of great uncertainty in the markets, sovereign bonds from countries with strong economies are a safe haven.

Investment in foreign bonds is facilitated by some of the brokerage houses that operate in national markets. However, we should bear in mind the high commissions of up to 500 USD for the acquisition of such debt securities.

Treasury bonds are addressed to both short-, medium- and long-term investors. Most countries issue bonds for a period of 3 and 6 months and 1-, 5-, 10-, 20- and 30 years.