Debt markets show signs of stress lifting

The amount of U.S. commercial paper outstanding grew this week for the first time since August, suggesting that distress in the short-term debt markets was easing.

Signs of a tentative recovery in corporate lending were also underscored by executives at Bear Stearns Cos., who said marketplace liquidity was improving and the outlook was still relatively strong for investment banking.

“You can just see the tension in the market ease,” Bear Stearns President Alan Schwartz said of the market’s reaction to the Federal Reserve’s interest-rate cut of Sept. 18.

Commercial paper outstanding grew by $4.5 billion in the latest week to $1.86 trillion, according to the Federal Reserve. The increase was the market’s first weekly rise since troubled sub-prime mortgages triggered a credit crisis in August and caused the commercial paper market to shrink precipitously.

Some pockets of the market are still weak. The amount of asset-backed commercial paper continued to fall -- by $6.1 billion this week to $906.2 billion -- because of mortgage-related concerns.

“Investors are not likely to have an appetite for buying any asset-backed debt tied to the mortgage market for years to come,” said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co.

In Europe, the European Central Bank and the Bank of England held their key rates steady, as expected. Analysts said the central banks wanted more time to assess the U.S. sub-prime crisis’ effect on consumer and economic confidence.

During presentations to investors Thursday, Bear Stearns executives sounded optimistic notes about the credit markets in general.

“We think the distress that we saw during the summer is largely behind us,” Jeffrey Mayer, a co-head of fixed income, said during a conference call.

The credit markets have undergone a “massive repricing” that has largely passed and is not likely to lead to an economic recession, Mayer added.

Bear Stearns had a turbulent summer with the collapse of two hedge funds and the ouster of co-president Warren Spector. The funds, whose failure cost investors $1.6 billion, are the subject of a federal criminal investigation, the Wall Street Journal reported late Thursday. Federal officials declined to comment and a Bear Stearns spokesman couldn’t be reached.