Spreads on US corporate bonds edged tighter on Friday, with bonds of May Department Stores seeing some of the strongest gains on reports that merger talks with Federated Department Stores had resumed. Spreads across the broad corporate bond market tightened about 0.01 to 0.02 percentage point, traders said. New issuance remains fairly subdued and the few deals hitting the market have drawn strong interest. Fifth Third Bank for example, boosted a sale of senior bank notes on Thursday by $300 million to $800 million in response to demand.

Spreads on May Department Store's 6.7 percent bonds due 2034 tightened to 1.45 percentage points more than Treasuries, about 0.13 percentage point tighter on the day, according to MarketAxess.

Talks between May and Federated are reaching a more serious stage, the Wall Street Journal reported on Friday, citing people familiar with the matter.

May and Federated have held informal merger discussions in recent months as the two department store chains seek ways to expand their geographic reach.

May's bonds would benefit from an acquisition by Federated, which is viewed as a stronger company.

Spreads also narrowed on bonds of Merck & Co after the drug maker said it would consider selling its arthritis pill Vioxx again if the US Food and Drug Administration decides that its cardiovascular risks are comparable to those of similar drugs.

Merck's 4.75 percent notes due 2015 yielded 0.75 percentage point more than Treasuries, about 0.02 percentage point tighter on the day, MarketAxess reported.

Merck voluntarily withdrew the drug in September after a study showed Vioxx doubled heart attack and stroke risk after 18 months of use.

In other markets, Treasury prices slid after a surprising jump in core producer prices raised worries about inflation risks and more aggressive interest rate hikes from the Federal Reserve.

Prices of benchmark 10-year Treasuries fell 21/32, yielding 4.27 percent.

Copyright Reuters, 2005