Yield premiums on high-grade and junk-rated corporate bonds edged lower on Friday after a report of tame inflation relieved concerns the Federal Reserve would act to slow the economy. The government said its Consumer Price Index, excluding volatile food and energy costs, rose just 0.1 percent in May, below forecasts.
The soft "core" inflation measure provided relief to stock and bond markets that had been buffeted for a month by fears of rising Fed rates and Treasury yields.
A drop in Treasury yields - which govern corporate and consumer borrowing costs - on Friday offered another sign that corporate borrowing costs wouldn't rise, leading investors to ramp up risky bets, money managers said.
A planned $6.1 billion buyout of Penn National Gaming Inc by Fortress Investment Group boosted prices of those bonds and others across the gaming industry. "The appetite for risk is again increasing somewhat given the favourable data on core CPI, and so riskier asset classes" are outperforming, said Chris Sullivan, chief investment officer for the United Nations Federal Credit Union.
Penn National's 6-3/4 percent junk bonds maturing in March 2015 jumped more than 4 cents per dollar face value to 103.75 in trading on Friday, up from June 8 when the last significant trade registered on bond trading platform MarketAxess.
Trump Entertainment Resorts Inc's 8.5 percent bonds maturing June 2015 were more active, rising about 60 cents to a record high of 103.50. Isle of Capri Casinos Inc's 7 percent bonds due in March 2014 registered the most trades on MarketAxess, rising about 1-1/2 cents to 99.38.
Credit derivatives indexes also suggest that investors were becoming more comfortable with risks. The yield spread on the series 8 HVOL index dipped to 88 on Friday from 90 Thursday and 94 earlier in the week, a money manager said. The narrower spread indicates banks will charge $88,000 for every $10 million worth of protection, down from $94,000.
"Tighter spreads today make sense to me with the stock market doing very well and Treasuries recovering on the back of benign core CPI," the manager said. Merger and acquisition activity has also been the bane of fixed-income investments since the transactions are largely debt financed, and existing bondholders find themselves fighting to recover full value of their investments.
Bonds of TXU Corp fell sharply on Friday after the company detailed more of the financing plans for its leveraged buyout, including debt commitments of about $37.2 billion. The Texas Power Company is being acquired by a private equity group led by Kohlberg Kravis Roberts and Texas Pacific Group in the largest leveraged buyout in history. TXU's 6.55 percent bonds due in 2034 fell to 80.6 cents on the dollar on Friday, down from 82.125 cents on Thursday, according to MarketAxess.
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