First Union Corp. issued $225 million of subordinated debt on Tuesday, one of the more successful bank borrowings of recent months, market sources said.

The 10-year issue was expanded from $200 million because of strong demand, a source said.

The issue was priced to yield 8.05%, 118 basis points over 10-year Treasury notes.

The yield spread to Treasuries was slightly tighter than the 120 basis points proposed when the issue was marketed earlier in the week.

"It's been a long time since a deal has moved like this," said one capital markets source.

Funds Get Pricier

First Union is the first large banking company to pay more than an 8% yield for 10-year subordinated debt since July, according to Securities Data Co.

This reflects the steep increase in yields of benchmark 10-year Treasuries, which were trading at 6.87% Tuesday, compared with 6.30% at the start of October.

Besides its high yield, the First Union issue was helped by a reduction in new subordinated debt issues by banks in the fourth quarter.

Issuance Slows

Banks issued a whopping $11 billion in subordinated debt through Sept. 30, including $3.6 billion in the third quarter alone, according to Securities Data.

This heavy supply caused yield spreads over benchmark Treasury notes to wide dramatically in September, discouraging issuance.

New subordinated debt sales have slowed in the fourth quarter to $1.4 billion, including the First Union issue.

First Union, one of the largest superregional bank holding companies, is attracting investor interest in its own right. This has caused yield spreads to Treasuries on the Charlotte, N.C., company's existing bonds to narrow.

Yield Spread Has Narrowed

Ann Robinson, a bank bond analyst with Donaldson, Lufkin & Jenrette Securities Corp., said the yield spread on First Union's outstanding 9.45% subordinated bonds due in 2001 has narrowed by 15 basis points, to 115, since late October.

"This is a relatively good point in time for First Union to issue," Ms. Robinson said.

Goldman, Sachs & Co. was lead manager, with First Boston Corp. and Merrill Lynch & Co. acting as co-managers.

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