KeyCorp Holds Back Medium-Term Notes

Albany-based KeyCorp has put a $400 million medium-term note program on hold, in the wake of last week's surprising rise in yields on Treasury securities.

KeyCorp's decision recognizes the discretionary nature of its program, "and we thought interest rates would take a turn for the worse, at least short term," said Lee Irving, KeyCorp treasurer.

This action may also indicate a peak in 1991's improved debt-issuing climate for banks.

The program was suspended last Wednesday. It was set up in January to replace KeyCorp's commercial paper program, suspended in December 1990. Since then, it has been used for more discretionary financial strategies, Mr. Irving said.

Overtones for Goldome Bid

Increasing yields may also delay a planned $150 million preferred stock issue to help finance Key's purchase of Goldome from the Federal Deposit Insurance Corp., Mr. Irving said

Yields on two-year Treasury notes are up 13 basis points since June 5 and 25 basis points since May 31. Yields on five-year notes are up 11 basis points since June 5 and 24 basis points since May 31.

Diverting Treasury Views

"Interest rates are heading up perhaps sooner than we expected," Mr. Irving said. "Our economist had said they would turn in the third or fourth quarter."

Several banks have issued medium-term notes during the first half of this year, as interest rates continued to fall and issuing spreads narrowed. But disagreement over the direction of Treasury yields makes prospects uncertain for medium-term notes.

For example, economists at Donaldson, Lufkin & Jenrette Inc. believe the market will shake off the inflation concerns now driving yields higher, and that Treasury yields will fall.

The window seems to be closing a bit for banks wanting to issue debt, said Anne Robinson, Donaldson's bank-bond analyst.

Spreads Growing Narrower

To date, KeyCorp has issued $150 million in medium-term notes, in three waves. The most recent wave, during the past three weeks, amounted to $80 million, Mr. Irving said.

Spreads have been narrowing throughout the program, he added. From here on, he said, issuing will become more expensive: Spreads are not likely to narrow further and yields that investors demand are rising.

Spreads for the January medium-term note issue were 155 basis points over the two-year Treasury bill, Mr. Irving said. The most recent issue was at 120 basis points over the five-year Treasury bill.

PHOTO : Treasury Yields Creep Upward

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