Signs of Easing Credit and Stimulus Talk Lift Wall Street

After weeks of extraordinary efforts by the world’s governments and central banks, the frozen flow of credit began to thaw on Monday.

The tentative re-emergence of trust among lenders — a rare commodity of late — raised hopes that the immediate financial pressures on banks, businesses and municipalities could ease somewhat, cushioning the blow of a likely recession.

That encouraging signs appeared at all was enough to bring a wave of relief to Wall Street, where the Dow Jones industrial average rose 413 points, or 4.7 percent. As recently as last Friday, it was far from certain how quickly the unprecedented moves to unlock global credit, including the partial nationalization of some of the world’s biggest banks, would make a difference.

“Fear really appears to have receded considerably,” said John V. Miller, the chief investment officer of Nuveen Asset Management.

A benchmark borrowing rate among banks, known as Libor, dropped on Monday by the largest amount in nine months, an indication of growing confidence in the financial system. Local and state governments found buyers for bonds that had gathered dust for weeks. Banks and money market funds opened their coffers to corporate borrowers, reducing rates on short-term loans.

The improvements in the credit markets came as welcome news to American businesses large and small, which depend on short-term financing for their daily operations. Economists warned, however, that American consumers might face a more difficult road.

On Capitol Hill, the chairman of the Federal Reserve, Ben S. Bernanke, told lawmakers that the “risk of a protracted slowdown” merited the introduction of new measures to help individual Americans gain access to credit. Mr. Bernanke did not specify the size or scope of any plan.

The Bush administration is under pressure to do more to help the economy and Democrats in Congress plan to devise a second stimulus measure. The Treasury Department, meanwhile, hopes to spur a new round of mergers among banks by steering some of the money in its $250 billion rescue package to banks that are willing to buy weaker rivals, according to government officials.

While these efforts may provide some relief, the concern is that it may take time before they have a major impact on the economy. Loans are likely to remain scarce for many small businesses and consumers.

Credit is unlikely to flow freely soon, said Max Bublitz, chief strategist at SCM Advisors, an investment firm in San Francisco. “It’s going to be doled out in small pieces over the next few months,” he said.

Since the collapse of Lehman Brothers in mid-September, the credit markets entered a state of near paralysis, keeping many businesses and municipalities from obtaining financing.

For now, market watchers can celebrate that credit is being given out. Interest rates on common types of commercial paper — effectively short-term i.o.u.’s issued by businesses — fell to a four-month low.

Companies began registering on Monday for a new program that would allow them to sell commercial paper to the Fed, the first time the central bank would lend directly to American businesses since the Great Depression. The program will go into effect next Monday and appeared to help build confidence in the short-term financing market.

Companies sold about $3.3 billion of bonds in the United States last week — a historically low level — but are now looking to raise about $15.5 billion, according to Bloomberg News. Prices for municipal debt held steady for a third day on Monday after a monthlong sell-off.

“The money market funds are feeling, based on what we are hearing, a little bit more comfortable and confident,” said Mr. Miller of Nuveen Asset Management, who specializes in the market for municipal bonds.

The Pennsylvania Turnpike Commission sold $180 million of short-term loans on Monday. The market for longer-term municipal bonds, which had stagnated through last Friday, improved for the first time in weeks.

Still, the biggest municipal debt sales came from big names like the Long Island Power Authority, Harvard and the State of California, Mr. Miller said. Credit remains very tight for smaller outfits that are more directly threatened by the looming recession.

“The demand is re-emerging, but initially, it’s only emerging for certain types of bonds,” Mr. Miller said. The market for newly issued bonds, he said, had been “effectively shut down” for two months and remained stagnant on Monday. “So it’s early in the process,” he said. “You can’t call it a healthy market just yet.”

In a sign that investors are willing to take risks in other parts of the financial markets, the yields on three-month Treasury bills rose to a one-month high. Investors also showed more confidence in banks like Citigroup, Merrill Lynch and Morgan Stanley, as measured by the cost to insure their corporate debt, although those costs remained historically elevated.

In the corporate bond market, Illinois Power sold $400 million of 10-year bonds and Freddie Mac raised $2 billion.

Other investors appeared to cast off those caveats, moving out of Treasury bonds and showing a new willingness to brave the winds of the stock market. The Standard & Poor’s 500-stock index gained almost 4.8 percent, and the Nasdaq composite index climbed 3.4 percent. Shares of energy companies led the gains. Chevron and Exxon Mobil shares gained more than 10 percent.

A measure of volatility in the market, the VIX index, fell 25 percent from Friday, when it reached a record high. All major industry groups in the S.& P. 500 posted gains, and all 30 stocks on the Dow Jones industrial average rose for the day. “Credit markets have been leading the equity markets in recent weeks,” said David Kovacs, who oversees quantitative investing at Turner Investment Partners in Berwyn, Pa. The gains on Wall Street followed positive sessions on the European and Asian exchanges. Stocks in London on the FTSE 100 index ended more than 5 percent higher. Shares in Paris on the CAC 40 index rose 3.5 percent and Frankfurt’s DAX index gained 1.1 percent.

European stocks rallied after the Dutch government announced late Sunday that it would inject about $13.4 billion of new capital into ING, one of the country’s largest financial institutions.

“It’s pretty clear that the moves by the policy makers are slowly but surely unclogging the inability to lend and borrow,” Mr. Bublitz of SCM Advisors said. “I suppose a little bit of thaw feels a little good.”

In Asia on Tuesday morning, stocks opened higher. The Nikkei index in Tokyo was up 2.6 percent and the Seoul composite in South Korea was trading up 1.6 percent.