Diversifying one’s portfolio does not mean investing in different sectors or different financial products alone. A fixed income portfolio could be invested in different currencies and different countries mitigating the downside risks associated with a single currency or country. Investing in Eurobonds gives such an opportunity to the investors.
Eurobonds are bonds issued to investors outside the home country, denominated in non-domestic currency. They have a specific structure as identified by the EU directives. The Eurobonds are not necessarily being issued in the Euro zone, however most of the times the bonds are issued to European markets. Also, the bonds need not be issued in Euro, and are generally issued in US dollar or yen. The bonds are traded mainly in European markets and also traded in markets across the globe, and are available for trading throughout the 24x7. The bonds are generally termed based on the currency they are issued in such as Euroyen and Eurodollar. These bonds are basically of five types depending on their terms and features: Fixed rate bonds, floating rate bonds, subordinated bonds, asset backed bonds, and convertibles. Though the words foreign bonds and Eurobonds are interchangeably used, it should be noted that these are different from each other. Foreign bonds are just bonds issued to domestic market in external currency.
Eurobonds are a way to attract foreign funds into the country and hence in most of the country the bonds are exempt tax. These are attractive to individual investors, as Eurobonds are not subjected to the withholding taxes and are largely free from government regulation. Generally Eurobonds are issued to international entities with sound creditworthiness. These bonds help investors to gain exposure to certain sector or geography, which having any exposure to the currency risk. If a London-based investor wants to invest in real estate sector in China, but without having direct exposure to Chinese Renminbi (CNY), then the investor could buy Eurobonds issued by Chinese real-estate companies. Funds usually operates on mandates requiring them to invest in a category of bonds – investment grade, high yield, sovereign with a focus on geographies such as Asia pacific, MENA, or emerging markets. And hence invest in Eurobonds of these regions.
However, it is important that the investors hire advisors to help them invest in Eurobonds. This is mainly because of the operating structure of the Eurobond market and also the risk associated with Eurobonds. These bonds are first sold in primary market to closed set of investors called syndicate who then sell it to bond investors in secondary market. Since, most of these bonds are held mainly by institutional investors and very rarely by retail investors and more so held for long, the bonds are not liquid. Without financial advisors, it becomes difficult to access the Eurobond market. Apart from the accessibility, the investors need advisors to help them pick the right bonds based on the risk associated with the Eurobonds. To invest in any Eurobond, it is really important to understand the risk attached with the country and sector it operates in. Also, these bonds are influenced by the macroeconomic factors, movement in interest rates, currency rates that will impact the investment in long run.