Aug 15 (Reuters) - U.S. corporate bond spreads, the

premium over Treasuries that companies pay for debt, are

starting to recoup some lost ground after recent strong

economic data increased hopes for interest rate cuts and calmed

recession fears.

Investment-grade corporate bond spreads on Wednesday

tightened by 3 basis points to 105 basis points (bps), according

to the ICE BofA Corporate U.S. Corporate Index.

Junk bond spreads finished Wednesday at 346 bps, also 3 bps

tighter this week, according to the ICE BofA High Yield Index

.

Both high-grade and junk bond spreads retraced much of early

August's dramatic widening, after surprisingly weak July jobs

and productivity reports prompted concerns of a sharp economic

downturn and potential recession.

Economic data this week appears to have calmed recession

fears. U.S. consumer prices in July rose at their slowest pace

in nearly 3-1/2 years, while the cost of services fell by the

most in nearly 1-1/2 years.

Other data this week pointed to economic growth, including

July retail sales that rose more than expected.

"The primary driver of tighter credit spreads this week is

the Goldilocks narrative of growth without inflation," said

Nelson Jantzen, a strategist who covers high-yield bonds,

leveraged loans and distressed leveraged credit at JPMorgan ( JPM ).

The data has further assured credit investors that the

Federal Reserve has finished hiking interest rates and will

begin cutting rates as soon as September.

Forecasts now see a 76.5% probability of a 25 bp Fed rate

cut in September, according to CME's FedWatch Tool, up from 64%

on Wednesday.

"Recent data has given the market more comfort around the

likelihood of more accommodative policy at the next FOMC

meeting, and this has given investors increased confidence that

a substantial rise in rates is less likely," said Blair Shwedo,

head of fixed-income sales and trading at U.S. Bank.

Renewed optimism was helped by an overall lack of negative

surprises in borrowers' second-quarter earnings disclosures,

market participants said.

"Financials aside, consumer discretionary and industrial

companies were among the next strongest performers during Q2

earnings season, likely providing some support for services and

basic material sectors during the widening" of credit spreads in

early August, said Dan Krieter, director of fixed income

strategy at BMO Capital Markets

Almost $25 billion in new high-grade debt has sold this

week, versus forecasts of a weekly total of $30 billion heading

into the week, said Krieter.

Junk debt issuance has also recovered this week following

its lightest showing of 2024 last week, albeit at a slower pace

than high-grade deals, said Jantzen.