The credit markets, which bottomed with the near collapse of Bear Stearns in early March, have shown signs of rebounding based on a key...

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The credit markets, which bottomed with the near collapse of Bear Stearns in early March, have shown signs of rebounding based on a key measure. The difference in the interest rate on the three-month Treasury bill and the London interbank offered rate (or Libor) has narrowed in recent weeks.

A smaller spread indicates investors are willing to take more risk. Libor is considered the more risky of the two, so when the spreads narrow, it implies investors are not demanding as much of a premium for risk.

“Spreads have compressed significantly” since their widest point, which occurred in March, says Kurush Mistry, an interest-rate strategist at Lehman Brothers. But spreads are still wider than their historic average, Mistry adds.

Strong credit markets enable consumers and investors to borrow freely, powering the economy and stock market. Less worry about risk allows rates for both consumer and corporate loans to decline.

Martin Fridson, chief executive of Fridson Investment Advisors, says the Federal Reserve’s expansion of loans to investment banks and relaxation of collateral requirements have “generally restored some confidence.”

Overall, corporate loan volume is still down, and loans are skewed toward higher-quality borrowers, signs the market is still not normal, Mistry says.

But debt issuance skyrocketed to $151.3 billion in April from $85.5 billion a month earlier, according to the Securities Industry and Financial Markets Association.

Banks have been among the biggest issuers. Earlier in the year, many had to turn to sovereign wealth funds for capital.

“Investment-grade corporate debt is rebounding,” Fridson says.