Bank of Ireland pays just 0.625pc to borrow for mortgage deals
Bank of Ireland has tapped high levels of investor demand to issue a €750m covered bond backed by Irish residential mortgages in a deal that underscores the yawning gap between the rate it pays to borrow in international capital markets and what the bank charges customers.
Bank of Ireland issued the bond yesterday as investors continue to surge into a market propped up by long-standing support by the European Central Bank's quantitative easing programme.
The annual interest the bank will pay on the top-rated seven-year bond is 0.625pc, just 39.9 basis points over German government bonds costs.
Bank of Ireland customers can expect to pay rates of 3pc to 4.5pc for their mortgage.
In a sign of the cast-iron appetite for this asset class, investor interest in the deal pushed total orders out to two times the deal size, or €1.5bn. It is the first such deal in two years for an Irish bank.
So-called covered bonds are seen as low-risk for bondholders because the mortgages remain on the lender's balance sheet and the investor has recourse to both the issuing bank and the underlying assets.
Ryan McGrath, a fixed income specialist at Cantor Fitzgerald, said the deal represents a "small level of market engagement" by Bank of Ireland but stressed the group was already "well-funded".
In a statement, the lender said the "high quality of investor demand for this seven-year covered bond strongly underlines the group's ability to access funding from international capital markets".
A major reason banks pay so little to borrow on markets is ECB buying. At the start of last year it owned more than a third of the covered bond market.
(Additional reporting: International Financing Review)