Companies are selling high-yield, high-risk bonds at the fastest pace since credit markets seized up in 2007 amid signs the economic recovery is gaining momentum.

Renault SA, the second-largest French automaker, Pittsburgh-based U.S. Steel Corp. and other speculative-grade borrowers issued $24.2 billion of high-yield notes in March through last week, putting this month on course to be the busiest since June 2007, according to data compiled by Bloomberg. Sales are up from $16.2 billion in all of February.

Returns on high-yield bonds from around the world average 2.8 percent this month, headed toward the most since September, Bank of America Merrill Lynch indexes show. investors are more confident about buying the securities with the economic recovery taking hold. Earnings of companies in the msci World index that reported results this year beat analyst estimates by an average 9 percent, according to a Bloomberg analysis.

“Investors are much more sanguine about risk than they were just a few months ago and are taking on more to get a higher yield,” said Paul Owens, a credit analyst at liontrust investment services Ltd. in London. “Companies have reported decent results,” bolstering bond sales, he said.

Issuance of non-investment grade bonds is running at the highest since companies sold $34 billion of the debt in June 2007, after slowing last month amid concern that sovereign budget deficits would stifle growth. The securities are rated lower than BBB- by Standard & Poor’s and Baa3 by Moody’s investors Service.

Investors are pouring cash into junk-bond funds at the fastest pace on record as corporate defaults decline, according to EPFR Global.

Tighter Spreads

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government tightened 4 basis points last week to 154 basis points, or 1.54 percentage point, the narrowest since November 2007, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Spreads shrank from last month’s peak of 171 basis points on Feb. 16. Yields average 3.98 percent after reaching 3.96 percent on March 17, the lowest since September 2005.

Spreads on U.S. high-yield bonds narrowed 13 basis points last week to 598 basis points, according to a Bank of America Merrill Lynch index, while those on U.S. investment-grade bonds tightened 6 basis points to 168. Both are at lows for the year.

New York-based Goldman Sachs Group Inc., the most profitable securities firm in wall street history, sold $750 million of 10-year notes on March 19 in a reopening of a $2 billion offering. The 5.375 percent debt priced to yield 175 basis points more than similar-maturity Treasuries, compared with 190 basis points in the initial offering on March 1.

Payment-in-Kind

In Asia, Energy Development Corp., the Philippines’ biggest producer of geothermal power, hired three banks for a $175 million loan, according to two people familiar with the matter.

Air India, the national carrier, plans to sell bonds worth 7.95 billion rupees ($175 million) to fund the purchase of planes, Arvind Jadhav, chairman and managing director, said in a phone interview today.

Learning Care Group No. 2 Inc., the childcare provider majority owned by Morgan Stanley’s private equity unit, plans to sell $265 million of payment-in-kind notes that pay interest in the form of added debt, according to a person familiar with the offering. The deal is made up of five-year senior secured notes with a coupon of 10.5 percent payable in cash and 2.5 percent paid in extra debt, said the person, who declined to be identified because terms aren’t set.

The offering by Novi, Michigan-based Learning Care Group follows a $310 million sale of PIK notes on March 11 by Alion Science & Technology Corp., a McLean, Virginia-based provider of research and technology to the U.S. Defense Department.

Fed Exemption

The Federal Reserve Board removed an exemption it gave six banks at the start of the financial crisis in 2007 aimed at boosting liquidity in financing markets for mortgage- and asset- backed securities.

The so-called 23-A exemptions, named after a section of the Federal Reserve Act that limits such trades to protect bank depositors, were granted days after the Fed cut the discount rate by half a percentage point on Aug. 17, 2007. Their removal is part of a broad wind-down of emergency liquidity backstops by the Fed as markets normalize.

Investors reined in credit in 2007 as defaults on subprime mortgages began accelerating, causing losses on securities backed by the home loans made to the riskiest borrowers. Paris- based BNP Paribas SA said it halted withdrawals from three investment funds in August 2007, because France’s largest bank couldn’t “fairly” value their holdings.

Credit-Default Swaps

In another sign that markets are returning to normal, U.S. leveraged loan prices are approaching the highest levels in almost two years. The S&P/LSTA US Leveraged Loan 100 Index was at 90.50 cents on the dollar as of March 19, after reaching 90.59 cents the previous day, the highest since July 2008. The index returned 3.22 percent this year.

While cash bond markets are reflecting improving investor sentiment, derivatives are moving in the opposite direction. Benchmark indicators of corporate credit risk in the U.S. and Europe rose to the highest in two weeks on March 19 as European leaders differ over a proposed rescue plan for Greece.

Credit-default swaps on the Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt, climbed 2.8 basis points to a mid-price of 86.75 basis points, according to Markit Group Ltd. In London, the Markit iTraxx Europe index gained 2.8 basis points to 78.7. The indexes, which typically rise as investor confidence deteriorates, reached the highest since March 4, CMA DataVision prices show.

Greece, Portugal

The cost of protecting bonds in Australia from default rose today as benchmark indexes roll into a new series. The Markit iTraxx Australia index Series 13 was at 89.5 basis points at 10:48 a.m. in Sydney, according to Citigroup Inc. That compares with 84 basis points for Series 12 on March 19, according to CMA.

Concern that Greece will struggle to reduce a budget deficit that is more than four times the European Union’s limit of 3 percent of gross domestic product have weighed on credit markets the past two months. French President Nicolas Sarkozy is opposing Germany’s push for an International Monetary Fund loan to Greece and is backing a European solution to help the euro nation restore investor confidence and reduce Greece’s borrowing costs.

Swaps on Greece jumped 14.5 basis points to 330, CMA prices show. Contracts on Portugal climbed 12 to 136, Ireland rose 8.5 to 133 basis points, Italy increased 6 to 104 and Spain was up 9 to 110 basis points.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Economic Expansion

Companies have sold $200 billion of corporate bonds globally this month, up from $162 billion in all of February, Bloomberg data show. Sales for the year total $647 billion.

Junk-rated funds attracted $954 million during the period ended March 17 after setting a record the week before with more than $1 billion of receipts, according to EPFR, a Cambridge, Massachusetts-based research company.

The world economy will expand 3.6 percent in 2010, according to the median estimate of 51 economists surveyed by Bloomberg as of March 11, more than the 3 percent forecast they made six months ago. JPMorgan Chase & Co. economists expect global growth to reach “an above-trend 3.4 percent pace” as confidence improves and labor markets recover, according to the bank’s March 18 report.

Renault, U.S. Steel

The global debt default rate declined for the third consecutive month in February, sliding to 8.65 percent from 9.77 percent in November, according to S&P. The New York-based ratings company expects the U.S. rate to drop to 5 percent by year-end, from 10.38 percent last month.

Renault, based in Paris, sold 500 million euros ($678 million) of 5.625 percent bonds due 2017 on March 11, Bloomberg data show. The bonds are rated Ba1, the highest speculative grade, by Moody’s and a step lower at BB by S&P. The bonds have risen since being issued, pushing the yield spread down by 5 basis points to 302 basis points, according to HSBC prices on Bloomberg. PSA Peugeot Citroen is Renault’s larger domestic rival.

U.S. Steel’s $600 million of 7.375 percent bonds due 2020 were priced to yield 382 basis points more than Treasuries on March 16, according to Bloomberg data. The spread on the notes, which is rated Ba2 by Moody’s and BB by S&P, has narrowed to 372 basis points, according to Trace.

Barclays Forecast

Most of the junk bonds issued this month were in the U.S., with sales totaling $20.7 billion, Bloomberg data show.

Barclays revised upwards its forecast for European high- yield bond issuance, estimating in a March 18 report that companies in the region will sell a record 45 billion euros of the debt this year. That’s up from 33 billion euros in 2009 and 140 million euros the year before, according to the London-based bank.

U.S. Treasuries handed investors a loss of 0.43 percent this month, according to Bank of America Merrill Lynch index data. The benchmark government securities have gained 1.55 percent this year, the index shows. Investment-grade company bonds have gained 0.58 percent in March and 2.81 percent this year, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index.