The Royal Bank of Canada (RY) priced the first-ever covered bond backed by mortgages for U.S. investors.

The $2.5 billion offering carries a coupon of 1.2%, according to a bank spokesperson.

RBC received a "no-action" letter from the Securities and Exchange Commission in May allowing it to register its covered bond program with the agency.

The bank previously could, but the RBC covered bond guarantor, which will guarantee payments of interest and principal on the offering, previously could not, which is why a "no-action" letter was needed.

The bank will make regular reports to investors and the SEC as part of the agreement.

Jerry Marlatt, senior counsel at Morrison & Foerster, represented RBC in obtaining the no-action letter. He said the institutional investors and investment banks would be the main buyers for the covered bond.

"They're mostly people who buy agency debt and sovereign debt. And covered bonds give them the same sense of security and a little step up in yield. It's a very conservative investor base," Marlatt said. If retail investors wanted risk, he said, they would buy Treasurys.

Covered bonds are a popular vehicle for mortgage finance in Europe. A cover pool of mortgages, in which investors hold a preferential claim in the event of default, are a selling point. The maturity date on the bonds does not accelerate, making them more attractive to larger investors wanting to minimize risk.

In the RBC case, the guarantor will use principal collected from the underlying mortgages to either pay the principal due to investors or to acquire more mortgages to replace the ones being paid down, which keeps these products different from asset-backed securities.

However, the bonds are expensive, considering the dual recourse structure that leaves banks liable for losses.

This risk has the Federal Deposit Insurance Corp. opposing legislation in Congress from Rep. Scott Garrett, R-N.J., to set up a covered bond regulatory system in the U.S.

"That's nothing going to happen on that until after the election," Marlatt said. "It's tough to get this to the top of the priority list right now."