Israeli Investors Navigate Complexities of Buying Foreign Bonds

Israeli investors are increasingly looking to purchase foreign bonds, particularly those offering attractive yields like Alphabet's (Google's parent company) bonds yielding around 7.2%. However, the process of buying these bonds in the U.S. market, the world's largest, is proving more complex and costly for individual investors compared to the Israeli market.

Alphabet's high-yield bond, issued in Australian dollars and maturing in 20 years, has seen its price drop and yield rise since its issuance. Investors buying this bond are exposed to fluctuations in the Australian dollar against the Israeli shekel. The company also issued dollar-denominated bonds with longer maturities, such as one maturing in 2066, which offered a yield of 6.53% above U.S. Treasury bonds. The overall rise in bond yields globally, driven by factors like geopolitical tensions, inflation expectations, and interest rate hikes by central banks including the U.S. Federal Reserve, has increased the attractiveness of bonds but also complicated the investment landscape.

Buying individual bonds in the U.S. market typically involves over-the-counter trading with dealers, leading to wider bid-ask spreads compared to the transparent, order-book system of the Tel Aviv Stock Exchange. While minimum purchase amounts for some bonds are as low as $1,000 or $2,000, additional costs such as dealer spreads, commissions, and custodian fees can significantly impact returns, especially for smaller investments. In contrast, the Israeli bond market offers greater liquidity and lower transaction costs for corporate bonds.

For Israeli investors seeking easier access to foreign bonds, exchange-traded funds (ETFs) are a popular alternative. These ETFs, available in both U.S. dollars and Israeli shekels, offer diversification across hundreds of bonds and can be traded on stock exchanges. However, ETFs do not have a maturity date and their prices fluctuate with market interest rates. Investors can also opt for mutual funds that invest in foreign bonds, with some offering currency hedging to mitigate shekel-dollar exchange rate risks, though this hedging comes at a cost.

The article also touches upon the differing structures of Israeli and U.S. bonds, with U.S. corporate bonds often being 'bullet' bonds where the principal is repaid at maturity, unlike many Israeli bonds that amortize principal over time. Additionally, U.S. tax regulations offer exemptions on interest income for foreign investors who complete the W-8BEN form, while Israel imposes a 25% tax on interest and real capital gains from foreign currency-denominated securities.