Formosa bonds

In recent years, a new type of bond has emerged in the international financial market: formosa bonds. These bonds are denominated in a currency other than the issuer's domestic currency and are sold in Taiwan, hence the name "Formosa." In this blog post, we will discuss what formosa bonds are, their benefits, and risks.

Firstly, it is important to note that formosa bonds are not a new concept. They have been in existence since the 1990s, but their popularity has surged in recent years. The primary reason for this is the growing demand for Chinese bonds, particularly among Taiwanese investors. As the Chinese government restricts the flow of its bonds to foreign investors, formosa bonds offer a way for Chinese issuers to tap into the Taiwanese market.

One of the primary benefits of formosa bonds is that they offer diversification for issuers. By issuing bonds in a different currency, they can access a new pool of investors and reduce their dependence on their domestic market. This diversification can also help to mitigate currency risk, as issuers can match their revenues and expenses in the same currency.

From the investors' perspective, formosa bonds offer an attractive opportunity to invest in international bonds denominated in their domestic currency. This means that they can avoid currency risk, which can be a significant barrier to investing in foreign bonds. Furthermore, formosa bonds often offer higher yields than domestic bonds, which makes them an attractive option for income-seeking investors.

However, there are also risks associated with formosa bonds. One of the primary risks is credit risk. As formosa bonds are often issued by companies that are not well-known in Taiwan, investors may be unfamiliar with their creditworthiness. This can make it difficult to assess the issuer's ability to repay the bond, which increases the risk of default.

Another risk is currency risk. While formosa bonds offer investors the opportunity to invest in foreign bonds denominated in their domestic currency, this does not mean that they are immune to currency risk. If the issuer's currency depreciates against the domestic currency, investors will suffer a loss.

In conclusion, formosa bonds are a new and growing type of bond in the international financial market. They offer issuers diversification and investors the opportunity to invest in foreign bonds denominated in their domestic currency. However, investors should be aware of the risks associated with formosa bonds, particularly credit risk and currency risk. As with any investment, investors should carefully assess the issuer's creditworthiness and the potential risks before investing in formosa bonds.