Lloyds Banking Group is set to sell more than £2.8bn in new bonds backed by UK residential mortgages, in the first deal of its kind since the credit crunch began in the summer of 2007.

The transaction is being closely watched for its potential to reopen the market for residential mortgage backed securities (RMBS) in Europe, a market that provided a source of funding for banks and helped fuel the boom in mortgage lending before the crunch.