March 23 (Bloomberg) -- Whatever scare rising defaults of subprime loans wreaked on stocks and bonds may already be on the wane.

``The troubles in the subprime market won't affect the rest of the world,'' Neil Jones, head of European hedge fund sales at Mizuho Financial Group Inc. in London, said in a March 20 interview.

While everyone from Alan Greenspan, the former chairman of the Federal Reserve, to Bill Gross, manager of the world's largest bond fund, have acknowledged that mortgage defaults may slow the economy, Wall Street's biggest securities firms aren't fretting. The ``subprime risk flare'' will likely subside by early April, said Jack Malvey, global head of fixed-income strategy at Lehman Brothers Holdings Inc.

During the past three weeks, the Standard & Poor's 500 index, a benchmark of corporate America's equity, has risen 4.5 percent, recouping almost all of the past month's losses. The damage from subprime defaults has been ``contained,'' said Michael Materasso, a senior portfolio manager in New York at Franklin Templeton Investments, which manages $124 billion.

``There are few signs that the disruptions in this one sector of the credit markets will have a lasting impact on credit markets as a whole,'' Federal Reserve Bank of New York President Timothy Geithner said today at the Richmond Fed's 2007 Credit Markets Symposium in Charlotte, North Carolina.

S&P Rebounds

Sales of previously owned homes unexpectedly rose 3.9 percent last month, the biggest monthly gain in almost three years, the National Association of Realtors said today in Washington.

The S&P 500 index posted its biggest weekly gain in four years, rising 3.5 percent on the week. The index has regained almost all of the 75-point drop from Feb. 27 to March 5 that was triggered by a slide in Chinese shares and warnings by Greenspan that the U.S. economy was vulnerable to a slowdown.

The perceived risk of owning corporate bonds has fallen from a five-month high, and an index of derivatives tied to subprime mortgage bonds has gained about 14 percent in the past three weeks. Even emerging market bonds, among the riskiest assets, are rallying.

HSBC, New Century

Prospects for slower growth alarmed investors after both London-based HSBC Holdings PLC and Irvine, California-based New Century Financial Corp., the two biggest lenders to people with poor credit, said on Feb. 7 that more loans than expected were going bad.

The Fed encouraged investors on March 21 when it said, ``the economy seems likely to continue to expand at a moderate pace over coming quarters.'' U.S. stocks posted their biggest gains in eight months after the announcement.

Low unemployment and personal income growth ``is overwhelmingly more positive'' than subprime is negative for the economy, said Materasso at Franklin Templeton.

Subprime borrowers, those with poor or limited credit records or high debt burdens, made up about a fifth of all new mortgages last year. Late payments on the loans reached a four- year high of 13.3 percent in the fourth quarter, the Washington- based Mortgage Bankers Association reported last week.

Congress Weighs In

Lenders may foreclose on 1.5 million to 2 million homes in the next two years as defaults climb to about $225 billion, according to Lehman. About $170 billion of the defaults would stem from subprime mortgages, which now total $1.2 trillion, the New York-based investment bank said in a March 12 report.

Lawmakers may step in to protect borrowers. Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said this week that the Fed's failure to act earlier has put 2.2 million borrowers at risk of losing their homes.

``We could have done more sooner,'' Roger Cole, the director of banking supervision and regulation at the Fed, said at a hearing of Dodd's committee yesterday.

U.S. Representative Carolyn Maloney, a New York Democrat, said Congress should make proposed subprime-lending guidelines mandatory and broaden them to cover state-regulated lenders.

Greenspan fanned concerns on March 15 by saying he expects the fallout from subprime mortgage defaults to spread to other parts of the economy, especially if home prices decline.

More than 30 subprime lenders have closed in the U.S. since late 2006, according to a report by Scott Simon, a housing analyst at Pacific Investment Management Co. in Newport Beach, California.

``The vulnerability is really lying with the housing market, and we are certainly seeing weakness there,'' said Gross, the chief investment officer at Pimco, a unit of Allianz SE.

Markets Recover

That didn't slow the recovery in financial markets.

The CDX North America Investment-Grade Index Series 8, a benchmark measure of the risk of owning corporate debt, has fallen by about $2,000 per $10 million of bonds the past two days to $34,500, according to derivatives broker Phoenix Partners Group. A previous version of the index of credit-default swaps, which changes every six months, reached a five-month high of $40,000 on March 5, CMA Datavision prices show. A decline indicates an improvement in the perception of credit quality.

No `Huge Spillover'

``We have not seen a huge spillover to other areas of the credit markets,'' Morgan Stanley Chief Financial Officer David Sidwell said during an interview in New York earlier this week. The world's second-biggest securities firm by market value this week said its fourth-quarter profit rose 70 percent to a record $2.67 billion, helped by gains from originating, securitizing and trading residential mortgage loans.

The 10-year swap spread, one gauge of what companies pay to borrow over benchmark lending rates, dropped to as low as 51.10 basis points this week, the lowest intra-day level since Feb. 23 and down from 58.75 on March 5. The spread shows the difference between yields on 10-year Treasury notes and what companies have to pay to convert floating-rate interest payments to fixed. A basis point is 0.01 percentage point.

The extra yield investors demand to own high-yield, high- risk company bonds instead of risk-free Treasuries fell to 2.81 percentage points yesterday from the high this year of 2.99 percentage points on March 5, according to Merrill Lynch & Co. index data. High-yield, or junk, bonds are rated below Baa3 by Moody's Investors Service and below BBB- by S&P.

Corporate debt sales totaled $34.8 billion in the week ended March 9, more than double the previous week's total of $14.9 billion, when investors fled all but the safest assets. The weekly average this year is $24.6 billion, according to data compiled by Bloomberg.

Yield Premiums Narrow

Bondholders reduced the average yield premium demanded from developing countries to 1.68 percentage points more than Treasuries today from 1.94 percentage points on March 5, according to JPMorgan Chase & Co.'s EMBI Plus index.

Farallon Capital Management LLC, a San Francisco hedge fund that invests in companies facing cash shortfalls or bankruptcy, said this week it held talks to buy San Diego-based Accredited Home Lenders Holding Co. before agreeing to lend it $200 million.

Chicago-based Citadel Investment Group LLC, the hedge fund that bought bankrupt ResMae Mortgage Corp. two weeks ago, took a 4.5 percent stake in Accredited.

No `Panic Selling'

Fremont General Corp., the Santa Monica, California-based thrift that federal regulators ordered to halt subprime lending, said this week it reached an agreement to sell $4 billion of its loans.

An index of credit-default swaps on 20 mortgage securities rated BBB- and created in the second half of 2006 fell 36 percent from Jan. 18 to Feb. 27 when it reached a low of 62.25, indicating deteriorating confidence. Since then, the index has climbed 11.7 percent to 69.53, according to London-based Markit Group Ltd., which administers the ABX-HE-BBB- 07-1. The index traded as high as 97.47 on Jan. 19.

``There isn't any panic selling, and it looks like there is certainly a more or less upward trend in the market,'' said Donald Fewer, senior managing director and head of North American brokerage at GFI Group Inc. in New York.

To contact the reporter for this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net.

Last Updated: March 23, 2007 16:48 EDT