Bonds are an asset class that is traditionally used by investors to provide diversification from equity market investments as their market value is generally less volatile than share prices (although this is notalways the case).  They also offer avaluable income stream that can be re-invested if it isn’t required.

For UK investors, holding bonds that are issued in countries other than the UK can offer further opportunities to spread the risk and potential return in their portfolio. Bonds issued in different countries are generally known as “global bonds”.

We’ll look at what can be included in the global bond asset class, some of the main factors that drive their return and risk characteristics, and also how they have performed recently. We’ll also consider what might affect their performance in the foreseeable future.

What Are Global Bonds?

In simple terms, bonds are a way for institutions, such as governments or companies, to borrow money from investors. In exchange, the investor receives regular interest payments (the “coupon”) and the promise ofrepayment at maturity.

The term “bond”, in the investment markets, refers to a security issued by an institution, such as a government or company, that wishes to raise a loan from investors. They generally have a fixed redemption date anda fixed interest rate payable to whoever holds the security at a given time or at redemption.

During the life of the bond, the security is openly tradeable on the stock or bond exchange on which it’s listed, in a similar way to ordinary shares in companies. Each bond will have an issue value (e.g. $100) per bond and a fixed interest rate (the “coupon”). The issue value will be paid to whoever holds the bond at redemption, but during the life of the bond its value will go up and down depending on various factors.

There are some key terms to understand when looking at bonds:

• Duration:     The length of time until the bond matures. Longer duration bonds tends     to carry more risk as they can be as long as 30 years to redemption.     However they generally offer higher coupons to compensate for this.
• Coupon:    The interest payment made to bondholders. This is based on the issue price     rather than the market price.
• Yield:     A measure of the day-to-day income return, expressed as a percentage of     the market price. There are two yields to consider, “running yield” and     “yield to maturity”.

The day to day value of bonds is referenced by the yield. So, “rising yields” means bond prices are falling because buyers are getting more interest (higher yield) as a percentage of the lower price they pay.

·        Running yield is the interest the holderreceives as a percentage of the price paid. For example, if you bought a bondfor $90 that had an issue price of $100 and a coupon of 4% (i.e.$4) the runningyield to you would be 4.44%.

·        Yield to maturity would factor in thecapital return you would receive if you held the bond to maturity and received$10 more than you paid.

• Credit rating: An assessment of the issuer’s ability to repay its debts, typically graded by agencies like Moody’s, Fitch or Standard & Poor’s.

“Global bonds” is a broad term encompassing:

• Sovereign bonds - Debt issued by national governments, such as US treasuries, UK gilts, German bunds, or Japanese government bonds.
• Corporate bonds - Debt issued by international companies to finance operations, acquisitions, or expansion.
• Emerging market bonds - Debt issued by governments and companies in developing economies such as Brazil, India, or South Africa.
• Supranational bonds - Issued by international organisations like the World Bank or European Investment Bank.

Key Drivers of Global Bond Returns

All the following factors carry both risk and potential forhigher returns for future investors as a major driver of bond prices and yieldsis the market’s expectation of what will happen as well as what is already happening.

Credit-worthiness

Although a bond carries a “guarantee” of both the coupon andthe redemption payment, that guarantee is only as good as the institution that issues it. Whilst it is not common place for a country to default on its debt, it does happen. In 2022 Russia and Sri Lanka both defaulted on their sovereign bonds due to western sanctions in the case of Russia and a severe economic crisis in Sri Lanka.

Emerging economies are considered more likely to default whereas the UK and USA have never defaulted and have top “investment grade”credit ratings. However, the sovereign debt of lower rated countries will offera higher coupon than that of, say, the USA in order to attract investors, so opportunities exist to make a higher return if an investor is prepared to takea higher risk.

The same goes for corporate bonds, which will normally have a higher coupon because companies are more likely to fail than governments.

Leaving aside the risk of default, lower rated bonds willalso have a more volatile price in times of economic stress, as the risk of future default is perceived to increase. This can also offer investment opportunities if the market has been over-pessimistic and underpriced bonds.

Global and Local Inflation.

Because bonds have a fixed redemption price, they are not a good hedge against inflation. Their main attraction is their yield, which may compensate investors for a lack of capital appreciation in times of moderate inflation, but not when inflation rates are high (or the market expects them toincrease). When inflation starts to increase the prices of bonds in the market tends to fall, which compensates the new buyer as they are getting a higher running yield and yield to maturity.

Global and Local Interest Rates

Because bonds have a fixed coupon, they become less attractive to investors if interest rates are increasing or are expected to increase. In this case the price will tend to fall, and the yield increases to make the bond more attractive. Conversely, if interest rates are expected to fall, bonds already in issue become more attractive.

Currency Considerations

Global bonds are denominated in many different currencies and, for UK investors this can mean risks and opportunities. If the currency abond is denominated in falls against GBP, the investor will receive less in GBP if they the bond or when it redeems.

On a market scale, a weakening currency can make bonds in that currency more or less attractive to buyers. They may be cheaper to buy in the conversion from a stronger currency, but if the market is pessimistic on the bond’s currency, the price could be driven downwards.

Currency risk can be mitigated, especially if you invest via a mutual fund or exchange traded fund (ETF), by hedging.

Recent Background and Outlook for Global Bonds

After a number of years of healthy performance, bonds globally had a bad time in 2022 as global inflation, resulting from the Covid pandemic, spiked and led central governments to take drastic fiscal action tofund their responses to the crisis. There was a global rise in interest rates to combat inflation, and fear that this would be sustained for a number of years.

The result was a sharp fall in the price of bonds globally,and prices have been held relatively low by ongoing fears about global inflation, fed largely by US trade policy.

However, as at September 2025, the central banks of most major economies are now cautiously easing monetary policy and forecasting thatinflation will start falling within times varying from 6 to 12 months. Meanwhile, bond prices have remained relatively low, which means yields arequite attractive and there is also the potential for prices to increase.

The risk is that global inflation remains stubborn forlonger, which will put strain on bonds.

Why Consider Investing in Global Bonds

As part of a diversified portfolio with exposure to equities, bonds generally do reduce overall volatility. This often comes at the expense of lower long term returns. By having some exposure to global bonds there is the option to take a bit more risk in the hope of gaining higher returns, by investing in emerging market bonds or global corporate bonds.

There is also the option to limit your investment to investment grade sovereign bonds of developed economies, which could potentially offer higher returns than UK gilts without much more risk.

How to Invest in Global Bonds

In reality, for most UK investors, the simplest way to access global bonds is via a mutual fund or ETF, some of which hedge against currency risk. There are low cost options that track one of the main indices,or actively managed global bond funds that seek to outperform their benchmark index.

There are 3 main indices for global bonds and it’s important to know which one a fund looks to benchmark against:

·        Bloomberg Global Aggregate Index – tracksa wide range of investment grade sovereign and corporate global bonds.

·        FTSE World Government Bond Index (WGBI) –tracks investment grade sovereign bonds in over 20 countries.

·        JP Morgan Government Bond - Emerging MarketsIndex (GBI-EM) – tracks emerging market bonds.

Summary

If you are allocating part of your portfolio to bonds, you may wish to consider whether a part of the allocation should encompass global bonds as they offer diversity and the potential to reduce risk and increase returns. However the global bond marketis huge and selecting the appropriate strategy can be difficult. You should consider getting professional advice if you don’t fully understand the options available.

The value of your investment can fall as well as rise and is not guaranteed. Past performance is not a guide to future performance.

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