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Bank of Montreal Selling First Covered Bonds in Euros Since 2008

Bank of Montreal is marketing its first covered bonds in Europe since the financial crisis, fueling a resurgence of Canadian issuance in the region amid growing demand for secured debt.

Canada’s fourth-largest bank by assets is selling 1 billion euros ($1.4 billion) of securities backed by the nation’s residential mortgages, according to a person familiar with the matter. The Toronto-based lender is the country’s sixth bank to issue covered bonds in euros since Royal Bank of Canada returned to the European market in July, according to data compiled by Bloomberg.

The issuance in the world’s largest and oldest covered bond market comes as a second year of net negative supply spurs demand for new notes backed by mortgages and public sector loans. Investors are attracted to the securities because they are guaranteed by the issuer and will be exempt from European regulations that put bondholders on the hook for losses when banks fail.

“A lot of investors have used a good part of their credit limits with established euro issuers, so borrowers from new regions have extra appeal,” said Heiko Langer, senior credit analyst for covered bonds at BNP Paribas SA in London. “The high quality of the Canadian issuers means they tend to price tight; it is about diversification.”

Bank of Montreal’s five-year bonds will be priced to yield 9 basis points more than the mid-swap rate, said the person, who asked not to be identified because they’re not authorized to speak about the sale. That compares with an average spread of 32 basis points for notes listed on Bank of America Merrill Lynch’s Euro Covered Bond index, and 32 basis points for Cie. de Financement Foncier SA’s 1 billion euros of 10-year covered bonds, which are also in the market today.

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