By Jonathan Stempel
NEW YORK, Sept 25 (Reuters) - U.S. corporate bonds outperformed falling Treasuries on Wednesday as stocks surged and investors previously resistant to taking on credit risk emerged in force.
"There was so little activity yesterday that everyone seemed to have their buying shoes on," said an investment-grade trader. "Stocks are definitely driving the market."
High-quality corporate bonds outperformed Treasuries by 0.03 to 0.05 percentage points, while junk bond prices rose about half a point, traders said.
Bonds of automakers, among the biggest losers on Monday and Tuesday on concern about U.S. economic health and underfunded pension liabilities, were among Wednesday's best performers, traders said.
Ford Motor Credit Co.'s 7.2 percent notes maturing in 2007 and General Motors Acceptance Corp.'s 6.125 percent notes maturing in 2007 tightened about 0.2 percentage points to yield a respective 7.6 percent and 6.1 percent. Five-year Treasuries yielded 2.8 percent in late trading.
David Novosel, head of fixed-income research at Banc One Capital Markets in Chicago, said more volatility is likely.
"Over upcoming weeks we should see a mixed bag with some weeks mired by doom and gloom and others that show improvement," he said. "Safe-haven" bonds from consumer products companies and retailers should fare best, he said.
In late trading, 10-year Treasuries fell 29/32, as their yields rose to 3.754 percent. All major U.S. stock indexes rose more than 2 percent.
FLEMING
Fleming Cos. bonds rose about 10 cents on the dollar after U.S. grocery distributor said it will sell most of its 110-store retail supermarket operation and expects to receive $450 million in proceeds. Fleming said it has received multiple offers for most of its underperforming Food 4 Less and Rainbow Foods supermarkets.
"By applying $450 million in expected sale proceeds, plus $100 million from free cash flow, to reduce debt, Fleming will cut its debt outstanding by about 25 percent," said George Kirchwey, a high-yield bond analyst at SAMCO Capital Markets in New York who rates Fleming bonds a "buy" and does not own them. "That is a material reduction."
The company's 10.125 percent notes maturing in 2008 rose 10 cents on the dollar to 80.5 cents, driving their yield down to 15.52 percent, according to TRACE, the National Association of Securities Dealers' bond pricing service.
YIELDS, HIGH AND LOW
Also on Wednesday, office supply retailer Staples Inc. sold $325 million of 10-year notes yielding 7.5 percent, or 3.75 percentage points more than Treasuries, for an acquisition.
Also, Royal Bank of Scotland Plc , Britain's second largest bank, sold $750 million of 12-year global subordinated bonds yielding 5.043 percent, or 1.34 percentage points more than 10-year Treasuries.
Two kinds of yield peaks were also reached on Wednesday.
Merrill Lynch & Co. said the average high-yield bond on Tuesday yielded 10.15 percentage points more than Treasuries, the highest since 1991.
And money market fund tracker iMoneyNet Inc. said the ProFunds/Money Market ProFund/Service share class now yields zero, largely because of 1.83 percent of annual expenses.
"This should be a wake-up call for higher expense funds," said Peter Crane, iMoneyNet's managing editor. "Few people cared about expenses when yields were higher, but with money funds yielding so little, expenses should become a bigger issue" for shareholders and fund companies.
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