Better-than-expected US economic data and falling oil prices helped European corporate bonds push higher on Tuesday, as investors bet on a gradual rise in central bank interest rates.
The cost of credit protection on Germany's TUI pared earlier gains, as take-over speculation continued to unsettle Europe's biggest tourism group.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 50.6 basis points more than similarly dated government bonds at 1450 GMT, 0.6 basis points less on the day, and equalling the lowest level this year.
"We have seen buyers come back into the market with the focus on longer-dated securities," said one trader. "There is better sentiment out of the US and we could see spreads move in further from here."
Bonds rose after the US consumer price index fell 0.1 percent in July, while core inflation, which excludes volatile food and energy, rose 0.1 percent. Economists had expected CPI to have risen 0.1 percent and core consumer prices to have climbed 0.2 percent.
The FTSE Eurotop 300 index of pan-European blue chips was up 0.3 percent while the narrower DJ Euro Stoxx 50 index added 0.7 percent.
US oil prices were about $1 per barrel below the 21-year high of $46.91 a barrel struck on Monday as supply jitters eased after Venezuelan President Hugo Chavez won a referendum on his rule.
Concern that crude prices may damage both global economic growth and corporate earnings has hit market sentiment in recent weeks.
Widely held eurobonds of US car makers were two basis points tighter on average, traders said.
General Motors' 8.375 percent euro bond due in June 2033 was bid three basis points tighter at 283 basis points more than government debt.
Ford's 5.75 percent euro bond due in January 2009 was one or two basis points better at 133 basis points over government debt.
Elsewhere, spreads on consumer and retail sector bonds narrowed after several sessions of widening, led by French catering group Sodexho, said a trader in London.
Sodexho's 5.875 percent euro bonds due 2009 were bid six basis points tighter at 94 basis points over government debt by around 1403 GMT, he said.
Credit protection on the company cheapened two basis points to 75 basis points, meaning it costs 75,000 euros a year to insure 10 million euros of Sodexho debt against default.
Sodexho credit spreads widened at the end of last week on worries over conflicts with trade unions and a class action law suit in the United States.
"Retail is doing a lot better today generally and is tighter one to three basis points across the sector," a trader said.
Industrial and chemical bonds were also outperforming, he said, with the best gains among lower-rated and longer-dated securities most sensitive to changes in investor sentiment.
The high-yield market was firm with traders quoting prices between a quarter to a half point higher across the board as stronger equities and falling oil prices made for a bullish sentiment.
Five year default swaps on German tourism giant TUI were at 298 basis points on Tuesday afternoon, little changed on the day, but still around 15 basis points more than on Friday.
Investors were awaiting clarification on the potential sale of German bank WestLB's 31 percent stake in the company after Spanish hotel chains Sol Melia, NH Hoteles and Barcelo denied a news report they were interested.