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NEW YORK (Dow Jones)--Barclays sold its largest covered-bond offering in the U.S. to date Wednesday, contributing to the rapid growth of the dollar-denominated market for the mortgage-linked debt.
The U.K. bank sold $2 billion of 2.25% coupon covered bonds at a yield of 2.352%, or 153 basis points over the five-year Treasury rate.
Covered bonds are a type of secured debt that offer investors recourse to the issuer as well as to an active pool of mortgages ringfenced in the case of bankruptcy. The extra security typically earns them triple-A ratings, enabling banks to issue debt at lower interest rates.
Barclays' outstanding bonds due 2016 carry a 5% coupon and yield 210 basis points over Treasurys, according to MarketAxess.
J.P. Morgan strategists noted the dollar market for covered bonds, at $142 billion, is just 6% of the $2.5 trillion global market, but annual issuance has jumped from $6 billion in 2003 to $49 billion last year. The growth continues this year with $26 billion issued from January through April.
The covered market, which dates back more than two centuries in Europe, has been growing rapidly in the U.S. even though American banks have largely held back from accessing the market. They are waiting for Congress to establish legislation specifically allowing U.S. banks to ringfence assets during bankruptcy, which bank regulators have voiced some opposition to.
Meanwhile, international issuers are increasingly seeing the U.S. as a key destination to place covered debt, particularly while Europe struggles with its sovereign debt crisis.
"With the European investor base partially paralysed by continued volatility," many European issuers "have found themselves looking across the Atlantic to satisfy their funding needs," said J.P. Morgan strategists in the U.S. dollar Covered Bond Handbook 2012, published Wednesday.
The J.P. Morgan handbook noted that 55% of the dollar-denominated market has come from Canadian banks, which boast a geographical advantage, a healthy banking sector, and a royal guarantee from Her Majesty The Queen.
Scandinavian banks account for 19% of U.S. market volume, France makes up 9%, Germany 7%, and Australia 5%. U.K. banks, like Barclays, are only 3% of the U.S. market.
The last time Barclays sold a covered bond in the U.S. was Sept. 14, 2010, when it issued $1 billion of five-year notes with a 2.5% coupon, according to data provider Dealogic. They were priced at 109.5 basis points over Treasurys.
The Barclays bonds are backed by prime U.K. residential owner-occupied mortgage loans. Barclays underwrote the deal along with Citigroup, HSBC, and UBS.
-By Patrick McGee, Dow Jones Newswires; 212-416-2382; firstname.lastname@example.org