BANK OF Ireland has paid a premium to borrow €750 million in the first public benchmark bond sold by a Government-guaranteed bank in six months.

The bond was priced at 420 basis points (4.2 percentage points) over the benchmark midswaps rate – equal to 482 basis points over German government debt, a margin that determines the risk investors assign to funding.

It is understood that while the cost to the funding is high, the bank wanted to prove that it could tap investors in the bond markets.

Shares in the bank fell by 1.3 per cent, or 1 cent, to almost 58 cent.

The pricing of the bond was in line with the risk premium demanded by investors to hold debt default insurance on Government-issued bonds, a proxy for risk in the market.

The interest rate paid to investors on the bond is 5.9 per cent, though one debt market analyst described the bond as “miniscule” in proportion to the overall composition of the bank’s funding.

“It is a marginal piece of funding for the bank,” he said. “It is a more symbolic move – the bank is showing the market that they can go out and raise funding.” The bond is guaranteed by the Government under the Eligible Liabilities Guarantee scheme, which allows lenders to raise funding under the State guarantee on specific bonds of up to five years.

Investors bid more than €1 billion on the bond which matures in May 2013, the bank said. It was sold to more than 60 investors in 21 countries. Three quarters of the investors are based overseas and include major international banks.

Bond market sources said a number of Irish financial institutions were among the investors, though they did not know their level of participation in the bond.

This is the first public benchmark bond raised by a Government-guaranteed Irish financial since Irish Life Permanent borrowed €1.25 billion last April.

Irish lenders have avoided public bond sales due to investor fears on the Government’s ability to cover the cost of the banking bailouts and to reduce the €19 billion deficit in the public finances.

Bank of Ireland’s bond issue brings to €1.1 billion the sum raised by the bank in one public and two private deals since June.

The bank paid investors 175 basis points over the midswaps rate when it raised $2 billion (€1.45 billion) on public bond last February prior to the debt crisis.

The bank has raised funding in private transactions in recent months but this was the first public transaction since it boosted its capital reserves by €2.9 billion in a rights issue and exceeded a regulatory capital target.

“While this was expensive, the bank is trying to achieve its aim of increasing the duration of funding to beyond one year,” said Oliver Gilvarry, head of research at Dolmen Stockbrokers.

The market’s response to the Government’s four-year economic plan will determine whether the banks can reduce their own funding costs, said Mr Gilvarry.

“The cheaper it is for the Government to issue bonds, the cheaper it is for the banks. Will the austerity measures be enough to bring in spreads? If they are, it will make it easier for the banks.”