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The cost of protecting European corporate debt against default fell on Tuesday, with confidence boosted by rising equity markets and an improved bid for Bear Stearns.

JPMorgan has increased its bid for Bear from $2 to $10 per share. This was good news for financials since “it implies there was more value in Bear than initially assumed,” analysts at BNP Paribas wrote in a note.

The iTraxx Europe index, which measures the cost of protecting the debt of 125 investment grade European companies, fell to 109 basis points in morning trade, from 132bp at Thursday’s close.

The iTraxx Crossover index of 50 mostly junk-rated borrowers tightened to 539bp, from 593bp at Thursday’s close.

However, some analysts said a large part of the rally was driven by traders covering their short positions. In addition, trade was extremely thin.

A growing contingent of credit analysts say their has been a fundamental shift in credit markets because of the increasingly interventionist Fed. The rules of the game have changed, they argue. Jim Reid, strategist at Deutsche Bank, said:

Overall we remain convinced that March 11th marked a turning point in this crisis, not necessarily for the economy or for equity markets medium-term, but certainly for credit. This was the day that we can safely say we no longer operated in a free market. Up to this point the initiatives aimed at combating this credit crisis were dwarfed by the negative market forces, and particularly overwhelmed by the unwinding of leveraged positions. With the advent of TSLF and the subsequent actions around and after the manufactured bail-out of Bear Stearns there is no doubt in our minds that the authorities (well the Fed at any rate) have stepped up a gear.