$105 billion worth of US government bonds taken out of the Fed

$105 billion dollars worth of US government bonds out of the Federal Reserve, according to the latest data from the US central bank.

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 A withdrawal of this scale is unprecedented. It’s important to note that just because these assets were pulled from the Fed doesn't mean that they were actually sold.. Liquid though the US bond market is, if someone dumped more than $100 billion of bonds on it, it would cause a pretty good ripple, which likely would have pushed up government bond yields sharply. Nothing like that has happened over the last week.

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So it’s more likely that these Treasurys were just transferred to another, perhaps more neutral, bank. Maybe just for safe-keeping, until all this unpleasantness blows over. Anyway, there’s plenty of speculation along those lines at the moment.

Is there a Chinese Cooldown?

China’s economy slowed markedly in the first two months of the year, with growth in investment, retail sales and factory output all falling to multi-year lows, a surprisingly weak performance that raises the spectre of a sharper cooldown.

The weaker-than-expected data is bound to amplify global investors’ worries about slackening growth in the world’s second-largest economy, and will almost certainly feed speculation that Beijing may loosen policies soon to bolster growth.

China’s industrial output rose 8.6 per cent in the first two months of 2014 from a year earlier, the National Bureau of Statistics said today, missing market expectations for a 9.5 per cent rise.

That marked the worst performance for China’s factory output growth since April 2009. “Policy easing should be imminent,” said Hao Zhou, an economist at ANZ Bank in Shanghai, adding that Thursday’s data implied that China’s economy may grow 7 per cent in the first quarter.

Sources earlier this week suggested that China’s central bank is prepared to take its strongest action since 2012 to loosen monetary policy if economic growth slows further, by cutting the amount of cash that banks must keep as reserves.

A cut would be triggered if growth slips below 7.5 per cent and towards 7.0 per cent, and would be expected only in the second quarter, according to the sources who are involved in internal policy discussions.

Other sectors of the economy also appeared to have lost steam. Growth in retail sales was the slowest in three years, up 11.8 per cent in January and February compared to the year-ago period. Analysts had expected a rise of 13.5 per cent. Fixed-asset investment, an important driver of economic activity, fared even worse. It was up 17.9 per cent in the first two months from the same period last year, a level unseen in 11 years and some way below forecasts for a 19.4 percent increase.

Asian stock markets and most regional currencies such as the Australian dollar and China’s offshore yuan pared early gains after the data was released.

The statistics bureau released combined data for January and February in a bid to reduce distortions seen in single-month data caused by the timing of the Lunar New Year holidays, when factories, offices and shops often close for long periods.

Trade data last week showed January-February exports fell 1.6 per cent from the same period a year earlier, and tumbled 18.1 per cent in February alone, alarming financial markets.

Many analysts believe Beijing will not consider further easing until more months of data are available. But even accounting for holiday-related shutdowns and distortions, the broader weaker trend so far in 2014 appears clear.

China’s government, which wrapped up its annual parliament meeting today, had said last week that it aims to grow the economy by 7.5 per cent this year. But with growth appearing to drop faster and sharper than what many have expected, some economists believe that China may actually miss its growth target this year for the first time in years.

Reuters

Marketwatch interview of Randall Kroszner-Tapering,housing,inflation and the Chicago Cubs.

WASHINGTON (MarketWatch) — Ahead of next week’s Federal Reserve meeting, one former official agrees with many of the committee that it’s time to change the central bank’s guidance on how long it will keep short-term interest rates near zero.

But to what is the question.

Randall Kroszner, a former governor of the Federal Reserve between 2006 and 2009 and now a professor at the University of Chicago Booth School of Business, talked to MarketWatch about how the central bank can thread the needle between both a qualitative and a quantitative approach to setting guidance, as well as his outlook on the economy — and the Chicago Cubs.

MarketWatch : The Federal Reserve policy committee is meeting next week. Will they continue to taper?

Kroszner : I don’t think there has been any new evidence that has come to the Fed to change the decision to continue the reduction of asset purchases.

MarketWatch : What would it take for them to change?

Kroszner : It would take quite a bit for them to change the so-called taper. They’d have to have a significant change in their perception of the risks in both the U.S. and global economy, a significant change in labor market performance, or a significant change in inflation.

MarketWatch : Why does the Fed insist that taper is not on a “pre-set course?”

Kroszner : They have started to think that some of the costs may potentially be outweighing the benefits or asset purchases. And since at least the [economic] data so far are coming in broadly within their forecasted range, there is really not much of a reason to change the policy that they have set on which is to have this gradual step-down.

MarketWatch : How to you see the economy. You’re optimistic that we could see growth in 2014 around 3%?

Kroszner : There is a reasonable chance of achieving higher growth than we’ve seen over the last few years. But we still have a lot of headwinds. We seem to have put some of the fiscal uncertainty behind us, which I think has been a very important drag. We still have a lot of uncertainty on the regulatory front, particularly health care affecting the willingness of firms to hire, and then, of course, there are global uncertainties. The U.S. fundamentals would likely get us to 3% growth for this year, but there are still a lot of things that could go wrong to challenge that.

MarketWatch : What is your outlook for housing?

Kroszner : The Fed has been able to thread the needle and pursue the policy that it wishes to, which is to reduce the pace of asset purchases, without it having significant negative repercussions on the housing recovery.

MarketWatch : What is your outlook for inflation?

Kroszner : In the short and intermediate run, it is very hard to see where the inflation pressures would come from. It is possible that with a more robust labor market recovery we will start to see some growth in wages, and, actually, that would broadly be welcome. But given the slow pace of the recovery and given that it looks like much of the rest of the world is not recovering very rapidly, you are not going to be getting a lot of external pressures on inflation. And so, it is likely that inflation will continue to stay low for the intermediate term.

MarketWatch : Given this outlook, what will the Fed do at the meeting? Do you see a change in the forward guidance?

Kroszner : I think the substance of the policy is unlikely to change because the data have really has been consistent with their forecasts and where they were a few months ago. However, it is time to seriously re-think that 6.5% unemployment target because we are so close to it.

MarketWatch : How will they change it?

Kroszner : A move from 6.5% to something that might be more qualitative would be perceived by the market as not a substantive change in policy even though it is a substantive change in the words.

One way to think about it is to look at the evolution of the forward guidance over the last five years. So five years ago, when I was there, we introduced the idea of keeping extraordinary accommodation for an extended period. Then there was a move to an explicit date and then a move to 6.5% as a guideline.

Those other transitions were smooth because the Fed had gotten market expectations to be roughly where they wanted them to be, and then they could move on to a different way of expressing it, and that is likely to be what will happen now.

MarketWatch : So what will it look like, something like the Bank of England’s 18 different measures of labor market health?

Randall Kroszner, ex-governor of the U.S. Federal Reserve, in 2012. 

Kroszner : What came through loud and clear in the market’s response to the Bank of England’s approach is that was not helpful. There is an optimal amount of transparency. When you start going with too much detail then that transparency becomes opacity. It is more likely the Fed will be more qualitative about the state of the labor market, with some particular indicators mentioned but perhaps not as much focus on the unemployment rate in and of itself. Given market expectations being so well grounded from the forward guidance from before, they can make that transition reasonably smoothly.

MarketWatch : So the Fed can move because they’ve earned the market’s trust?

Kroszner : Moving away from 6.5% unemployment is not going to change the way the market thinks. They are going to realize that this is not an attempt by the Fed to change market expectations or a fundamental change in the way they are looking at things. It is just given that the unemployment rate has fallen by so much, and mostly for not the best reasons, that they will use different words but really convey the same substance about how they are thinking about the economy and what they are likely to do.

MarketWatch : When do you think the first rate hike will come?

Kroszner : I do think it will come sometime in my lifetime.

It really is based on the economics, the data, and the forecast. If the economy grows roughly in line with their forecast, then you could start to see a move towards to some interest rate increases in late 2015, but obviously things could change. There could be other shocks. It is possible if the economy takes off more rapidly, and the labor market starts to recover more rapidly, we could start to see a move up in inflation and then I think the Fed would be forced to act a bit earlier. Models always have smooth transitions. In the real world we never get that smoothness. So I am sure that something will happen that will be inconsistent with the forecast to either make the Fed move a little bit faster or a little bit slower.

MarketWatch : So which will happen first? The Cubs win the World Series or short-term interest rates get to 4%?

Kroszner : I think that’s a close call. 

There's no limits to what a central bank can do

Bank of Japan Governor Haruhiko Kuroda said there were "no limits" to what the central bank can do if it saw the need to adjust monetary policy in the future, signaling readiness to expand stimulus further if risks threatened its price target.

Haruhiko Kuroda

Kuroda, in an interview with Japan's Jiji news agency conducted on Thursday, said the country was moving steadily toward achieving the BOJ's 2 percent inflation target with no big risks to the outlook for now.

But he added that external risks "must be watched carefully" given recent volatile market moves that reflected overseas developments such as the escalating tension in Ukraine.

The BOJ offered an intense burst of monetary stimulus in April last year, pledging to buy assets aggressively to accelerate consumer inflation to 2 percent in roughly two years in a country mired in deflation for 15 years.

It has stood pat since then despite market expectations of additional stimulus to cushion the impact from a sales tax hike that will take effect in April. It has argued that the current ultra-loose policy was enough to keep the economy on track to meet the price target.

Kuroda said what was most important was to achieve the 2 percent price target at an early date, according to Jiji, suggesting that the BOJ was ready to act if meeting the target became difficult.

He also said it was "not as if there weren't any steps left" for the BOJ to take if it were to ease again, countering views held by some market participants that having delivered a massive stimulus last year, the BOJ had no tools left to deploy.

On specific steps the BOJ could take if it were to act again, Kuroda said only that that depended on economic and price developments at the time, according to Jiji.

Some market participants speculate the BOJ, despite its upbeat economic and price forecasts, may try to surprise markets by acting quickly and pre-emptively. Kuroda countered that view too, saying he wasn't feeling pressure to "outwit" markets.

A strong pound could lead to low rates for longer

Charlie Bean 

The Bank of England could keep interest rates lower for longer if sterling strengthens much more, the Bank deputy governor Charlie Bean said on Monday, in a rare comment by the central bank on the level of the pound.

Bean said that sterling's current level was "fine", but that Britain would find it harder to enjoy a solid export-based recovery if the currency strengthened any more.

He also cautioned against getting "too hung up" about exactly when the central bank will raise interest rates from their record low 0.5 percent, after financial markets and other policymakers pointed to spring 2015 as a possibility.

In a speech to local businesses in Darlington, north east England, Bean said there were clear signs Britain's economy was on the mend, but that it was "early days" and the trade deficit needed to narrow to put growth on a more solid footing.

"Any further appreciation of sterling, which has risen almost 10 percent in trade-weighted terms since March, would not be particularly helpful in terms of facilitating a rebalancing towards net exports," Bean said.

In a question and answer session after his speech, he said a stronger sterling would could reduce inflation because of weaker import prices.

"We would be more likely to undershoot the inflation target in the medium term, and that would mean we would need to keep policy looser for longer than would otherwise be the case."

Last month Ian McCafferty, who sits alongside Bean on the BoE's rate-setting Monetary Policy Committee, also said further sterling strength would be a worry and could potentially make the bank delay raising interest rates.

Bean said British exports had been somewhat disappointing - especially in the services sector - although he said there were some more positive stories of businesses bringing back activities that had previously moved offshore.

Bean also warned against pinpointing spring 2015 as the date when the Bank would raise interest rates.

"(The) market curve implies a first rise in Bank Rate in the spring of 2015, though I should stress that we are likely to learn a lot between now and then about the pace of the recovery, the amount of slack and the evolution of supply, and the impact on costs and prices," he said.

"So I would counsel against getting too hung up about the precise date at which Bank Rate first rises."

McCafferty and fellow MPC member Martin Weale had both cited spring 2015 as a possibility for the first rate hike in recent interviews.

Bean said that when the Bank does raise interest rates it will do so gradually, and that rates are likely to remain below their pre-crisis average of around 5 percent "for some time" - perhaps around 2-3 percent, echoing the new forward guidance given by Governor Mark Carney last month.

But Bean did not go quite as far as MPC member David Miles, who last month suggested the "new normal" for monetary policy would be interest rates averaging below pre-crisis levels.

Bean said it was possible the Bank might not sell back all of the 375 billion pounds ($627 billion) of gilts which it bought under its quantitative easing stimulus scheme. Because banks might want to park more reserves at the Bank due to tighter regulation after the financial crisis, the Bank might need to hold more gilts as a counterparty.

"We may not be in a position to sell all of the gilts back, and some of them will of course roll over naturally," Bean said. The Bank has said it will reinvest the proceeds of maturing gilts while interest rates remain at 0.5 percent, but has not said what it will do after that.

MPC member David Miles also made the point in a speech last month that the Bank might need to hold on to government bonds as collateral for banks' reserves.

Bean said that although Britain's economic recovery has so far been driven by household consumption and housing market activity, there were reasonable grounds to believe business investment would take over as a major driver for the recovery.

He also said there was more scope for housing investment to continue driving growth, although perhaps only a little room for the household savings ratio to drop further as consumers save less as a proportion of their income.

The BoE's Financial Policy Committee was keeping a "beady eye" on the housing market, he added.

"(There) is a risk that increased demand for housing ends up mainly in higher house prices rather than more houses. If associated with excessive expansion in mortgage lending, that may create future financial stability risks."

Ireland technically back in recession but GNP pushed them through.

The Irish economy unexpectedly shrank last year on the back of a sharp fall-off in net exports linked to the so-called pharma patent cliff.

Preliminary figures published today by the Central Statistics Office (CSO) showed gross domestic product (GDP) contracted by 0.3 per cent in 2013.

Economists polled by Reuters had expected full-year growth of 0.3 per cent.

Gross national product (GNP), which provides a better picture of domestic activity as it excludes the profit flows of multinationals, increased for the second successive year, growing by 3.4 per cent.

The latest quarterly accounts indicated import growth outpaced exports during 2013, a reversal in the trend of recent years, resulting in a €1.02 billion decline in net exports.

Despite the pick-up in employment in the latter half of the year, personal consumption, which accounts for two thirds of domestic demand, fell 1.1 per cent.

The CSO’s figures also revealed GDP contracted by a worse-than-expected 2.3 per cent in the fourth quarter compared with the previous quarter.

This was driven in the main by 10.5 per cent decline in net exports and a 4.7 per cent drop in industrial output.

Fourth quarter GNP rose by 0.2 per cent on the previous quarter.

“Today’s numbers show that measured GDP in Ireland fell slightly in 2013,” Minister for Finance Michael Noonan said.

“By contrast, labour market conditions are encouraging. Employment data is a reliable indicator of underlying developments in the economy and figures released a fortnight ago show employment growth of 3.3 per cent year-on-year in the fourth quarter of 2013.”

 Much of Ireland’s problems last year stemmed from the expiry of patents in the key pharmaceutical sector, which depressed merchandise exports overall.

However,services exports remained resilient and were 7.1 per cent higher year-on-year in the fourth quarter.

At face value, the 0.3 per cent fall in GDP in 2013 indicates that the Irish economy was back in recession. However, GNP, excluding multinational sector profits, was up 3.4 per cent.

The ECB may wipe out a large part of the Irish Economy

Economist Morgan Kelly

Economist Morgan Kelly’s warning that the European Central Bank is planning a “clean-up” of Irish banks will be taken seriously by government, Minister for Finance Michael Noonan has said.

In a lecture at University College Dublin, Prof Kelly said a clean up of SME bank loans by the European Central Bank may lead to large section of economy being “wiped out”.

Prof Kelly, who was the first economist to predict the likely scale of the Irish banking collapse, said the “real crisis” for the Irish economy may not yet have happened.

What the lecture here

Rates will have to rise- FED

Janet Yellen has a message to markets: the Federal Reserve will keep interest rates low for a while yet and, when it does begin to tighten monetary policy, it will do so only slowly.

Janet Yellen

For now, the public has zeroed in on when the U.S. central bank might finally raise rates after more than five years near zero. But that tells only half the story: just as important for American families and businesses is how quickly the Fed will hike borrowing costs, and how high.

The Fed has telegraphed that the first rate rise is likely to come around the middle of next year, as long as the U.S. economy keeps healing, and policymakers are increasingly describing how the first tightening cycle in more than a decade will play out. It is an issue that Yellen, who took over as chair of the central bank last month, will almost certainly have to address after a policy meeting next week.

The plan for now is for a series of modest rate increases that do not risk sending the economy into relapse, according to Fed policymakers who have discussed it in recent weeks.

Dennis Lockhart, president of the Atlanta Fed

While an unexpected jump in inflation or a dangerous asset bubble could force its hand, the central bank is likely to deliver a dovish message of patience when it comes to removing its extraordinary monetary stimulus.

"What I'm anticipating is that the gradual rise in rates would acknowledge that there are still conditions out there that are sub-optimal," Dennis Lockhart, president of the Atlanta Fed, said in an interview last week.

"I can in no way predict exactly the conditions at that time," he added. But "I don't expect when we get to that point that we're likely to have to move the policy rate up in large chunks to get it high fast."

As with its easing cycle, the Fed will be in uncharted territory when the time comes to tighten. No major central bank  has had to raise rates after keeping them at effectively zero for as long as the Fed has in the wake of the 2007-2009 financial crisis and recession.

We don't need inflation targets,we adapt as we go in Canada

The Bank of Canada’s flexible inflation target has served Canada well in both tranquil and turbulent times and remains the right policy framework to address the current economic environment of persistently weak inflation,

Senior Deputy Governor Tiff Macklem

Senior Deputy Governor Tiff Macklem said on Saturday in a lecture at Concordia University’s John Molson School of Business in Montréal.

“Inflation targeting was designed against a backdrop of high inflation, but its key features of symmetry and flexibility also give us room to manoeuvre in an environment of disinflation.”

Mr. Macklem discussed the various causes of the decline in inflation since 2012. He said that this disinflation appears to reflect a combination of “bad” disinflation stemming from a significant and persistent excess supply in the economy, and “good” disinflation resulting from heightened competition in the retail sector. In theory, monetary policy should look through good disinflation as long as inflation expectations remain anchored, and work to offset bad disinflation. In practice, there is considerable uncertainty surrounding our measurement and projections, making monetary policy more of an exercise in risk management.

“We need to do our best to determine why inflation is below target, but no matter how hard we try, there will be uncertainty about our diagnosis,” Mr. Macklem said. “Our work at the Bank of Canada is both to sharpen the analysis as much as we can and, at the same time, to take account of the risks and uncertainties as we determine the appropriate course for monetary policy to achieve our inflation target.”

The Senior Deputy Governor highlighted that the floating exchange rate is a key element of the inflation-targeting framework, allowing for a made-in-Canada monetary policy and serving as a buffer against shocks to the economy.

“In light of the recent depreciation of the Canadian dollar, it bears stressing that the Bank does not have a target for the exchange rate - it has an inflation target. The exchange rate is determined in markets, and we neither promote any specific value for the Canadian dollar, nor thwart its movements.”

Does anyone know what is going on!

European Central Bank president Mario Draghi (centre) with Minister for Finance Michael Noonan and European Economic and Monetary Affairs Commissioner Olli Rehn attend an euro zone finance ministers’ meeting in Brussels on Monday. Photograph: Reuters/Francois Lenoir

The European Central Bank is failing to hit its own target for price stability. The difficulty is that the bank’s governing council may be unable to agree on effective measures, largely because of splits on national lines. That might prove very dangerous.

Give credit where credit is due. The announcement of the ECB’s Outright Monetary Transactions programme in the summer of 2012 – and the statement by Mario Draghi, its president, that the bank would do “whatever it takes” to preserve the single currency – restored confidence.

Bloodless coup

The ECB won the battle without having to fire a shot. After the announcement, yields on Italian and Spanish government bonds fell to far more tolerable levels.

But the ECB has been less successful in securing price stability. True, its target is not as unambiguous or as symmetrical as those adopted by other central banks. Its aim is to achieve inflation “below, but close to, 2 per cent over the medium term”.

Yet in the year to February 2014, headline inflation was 0.8 per cent. This is hardly close to 2 per cent. It is also highly dangerous, as is cogently argued in a blog by senior members of the IMF’s European department.

First, this low inflation has, as is to be expected, coincided with weak demand. In the fourth quarter of last year, eurozone real demand was 5 per cent below levels in the first quarter of 2008.

In Spain, real demand fell 16 per cent. In Italy, it fell 12 per cent. Even in Germany, real demand stagnated from the second quarter of 2011: this is no locomotive. The failure to offset this has made recovery of crisis-hit economies more difficult, lowered investment and created long-term unemployment. All this will deeply scar the euro zone.

Second, there is a risk the euro zone will fall into deflation.

Mr Draghi has described deflation as a situation where price level declines occur in a significant number of countries, across a significant number of goods and in a self-fulfilling way. By this definition, deflation is absent: only three countries have negative inflation and only a fifth of items in the consumer price index have fallen in price. Longer-term inflation expectations are also stable at close to 2 per cent, though short-term expectations have fallen.

Short-term view 

As the IMF authors argue: “One should not take too much comfort in the fact that long-term inflation expectations are positive”.

The data indicate that, in the long term, euro zone prices are expected to rise at a healthy 2 per cent a year. But long-term inflation expectations were also positive before three bouts of deflation in Japan. It was nearer-term expectations that turned more pessimistic – leading to falls in prices and wages that enabled deflation to take hold.

Put simply, the eurozone is just one negative shock away from deflation. The cushion is far too small. When negative short-term real interest rates are needed to avoid deflation, the situation is perilous.

Third, ultra-low inflation is itself costly. This is particularly true for countries that have to restore competitiveness. If inflation in core countries is low, then inflation in crisis-hit countries must be close to zero or negative.

Angel Ubide of the Peterson Institute for International Economics notes that average inflation in surplus countries is only 1.5 per cent, against 0.6 per cent in the adjusting economies. While falling prices would improve competitiveness, they would raise the real burden of private and public debt. This might well create another round of financial stresses.

If average inflation stood at 2 per cent, with the surplus countries on (say) 3 per cent and the adjusting countries on 1 per cent, the euro zone would be in far better shape: real interest rates would be lower, the economy would be stronger and internal adjustment would be faster.

If average inflation reached 3 per cent (roughly the level the Bundesbank achieved in Germany from 1980 to 1995), it would be still better.

The ECB has allowed the euro zone to fall into a deep and entrenched slump. The bank has also allowed the supply of money and credit to stagnate. The Bundesbank used to focus on these variables because over time they can put upward pressure on activity, wages and prices. But the ECB seems to be ignoring them. It is failing to do its job.

What can be done? The aim must be to raise demand and inflation in the euro zone as a whole, particularly in surplus countries. The aim must also be to improve credit markets.

The ECB should announce a symmetrical inflation target of 2 per cent, indicating that it will henceforth view excessively low inflation as a problem no less serious than rapidly rising prices. It should implement a programme of quantitative easing, purchasing the bonds of member governments in proportion to shares in the central bank.

Finally, it should announce a longer-term refinancing operation to unblock the flow of credit to SMEs.
Difficulties arise. Large-scale purchases of the bonds of crisis-hit countries are legal but may well trigger hysteria in surplus Europe.

The ECB would probably suffer a deep internal split if it sought to adopt such a policy. That could jeopardise its political legitimacy. The fear is that the ECB may be forced to pretend that low inflation is not a threat because it cannot agree on what to do about it.

The euro zone crisis is not over. Despite the emergence of a degree of stability, the situation remains very fragile. – Copyright The Financial Times Limited 2014

BOJ continue to slosh out the cash but looks like no change

The yen edged up on Tuesday after the Bank of Japan stood pat on monetary policy and its chief, Haruhiko Kuroda, said there was no need to adjust monetary policy for now.

The BoJ maintained its massive monetary stimulus, as widely expected, and stuck to its view that economic growth and consumer price increases remain on track. It downgraded its view of exports but upgraded its view of capital expenditure and industrial production.

"Dollar/yen has been in a range between 101-104 yen for much of this year, and the yen needs a fresh trigger for the next leg of weakness," said Peter Kinsella, currency strategist at Commerzbank. "That could come from a steady deterioration in Japan's trade and current account deficits."

The BoJ's next meeting on April 30 comes after a sales tax increase scheduled to take effect on April 1. The central bank will also release its semi-annual economic outlook then, which investors say could give it an opportunity to alter its outlook and justify a policy move.

Data on Monday underscored the recovery remains fragile. Japan posted a record current account deficit in January, and its fourth-quarter gross domestic product growth was revised down, suggesting the effects of BoJ easing might have begun to wane.

Banks make hay as the need for debt grows

Bank of Ireland and  CaixaBank are among banks selling covered bonds in Europe after yield premiums on the secured debt fell to the lowest point in almost six years.

Bank of Ireland said yesterday it had raised €750 million in five-year debt in an exercise it said was close to three times oversubscribed.

More than 140 international investors took up the debt, the bank said, with the issue priced 80 basis points above five-year mid-swaps

“The covered bond transaction was issued by Bank of Ireland Mortgage Bank under the Irish Asset Covered Securities legislation,” the bank said. The offering, yielding 1.82 per cent, is backed by a pool of Irish residential mortgages.

Separately, Spain’s third- largest lender is selling €1 billion of bonds maturing in 2024, according to people familiar with the deal.

The average extra yield investors demand to hold covered bonds in euros instead of government debt fell to 68 basis points, the narrowest spread since June 2008, according to Bank of America Merrill Lynch index data.

Borrowers are turning to covered bonds as a second year of negative net issuance spurs demand for the debt.

 Covered securities are attractive to investors because they will be exempt from European rules requiring bondholders to help absorb bank losses. That favorable regulatory treatment is combining with a second year of negative net supply to suppress the yield premium on the secured notes over government bonds.