SAN FRANCISCO (MarketWatch) - Worries about the health of the U.S. financial system, on the decline since mid-March, have snapped back as investors brace for more big loan losses at Lehman Brothers and other large investment banks.

The cost of buying insurance against bond defaults, one measure of investor fears of credit risk, have been rising for large, investment-grade companies in the last two weeks. That's a reversal of a trend in place since mid-March, when the Federal Reserve's landmark decision to help bail-out Bear Stearns Cos. knocked down mounting fears of a Wall Street meltdown.

"There are some concerns rising a little bit again on the back of Lehman's possible quarterly loss as well as the loss at British lender Bradford & Bingley (BB)," said Juan Valencia, credit analyst at Societe Generale in London.

"The fears are about what banks have on their balance sheets, what they haven't disclosed, whether there are more writedowns coming," he said.

This week, investors have homed in the possibility that Lehman Bros. LEH, and others could report surprisingly large losses when they report earnings for their May fiscal quarter later this month, and in Lehman's case, may need to drum up more capital to keep in good standing with creditors.

Standard & Poor's articulated some these fears on Monday when it cut debt ratings for Lehman, Merrill Lynch & Co. MER, +27.69% and Morgan Stanley MS, -2.35% , citing concerns about further write-downs in their holdings of U.S. residential mortgage portfolios and residential construction loans.

Spreads on Markit's index of North American, investment-grade credit default swaps rose to 110.5 basis points on Wednesday, or 27% higher from their levels at the beginning of May. Wider spreads in this index of large, mostly nonfinancial companies, indicate that investors want higher payments for insuring their counterparties against the risk a company will default on its debt, a sign of increasing nervousness.

Similarly, spreads on Markit's iTraxx Europe index have climbed to 81 basis points, up 27% from the start of May.

"The bias is definitely toward spreads widening again," said Rajeev Shah, a credit portfolio strategist at BNP Paribas in London.

Investors outside the complex world of credit trades pay attention to these indexes because they can give a day-by-day snapshot of how optimistic investors are feeling about the health of financial markets. Both indexes have fallen sharply after spiking in mid-March.

And these indexes also closely correlate with what happens in U.S. stock markets.

The S&P 500 SPX, -0.48% , which hit a 52-week low on March 17, about the time of the Bear Stearns rescue, has fallen 4% since hitting a four-month high on May 19. It's yet to retouch its 200-day moving average.

Although the largest U.S. investment banks aren't part of the CDX or iTraxx Europe indexes, investors' perception of their credit risk had made an outsized impact on these gauges. That's because their huge trading businesses make a secondary market for many types of loans and bonds. Troubles in their own portfolios signal they could rein in some of their lending and trading activities, making it harder for companies in general to borrow.

Default risk for Lehman Brothers, which analysts say needs to raise more capital to avoid a ratings downgrade, have made the biggest jump amongst its peers. Credit spreads widened to 274 basis points on Wednesday, up 85% since May 1, Markit says. Read more on Lehman

Credit default swap spreads for Morgan Stanley, Goldman Sachs and Merrill Lynch have also widened since the start of May, though not by the same degree.

When Bear Stearns was on the brink of collapse, Lehman Brothers also faced rumors of an imminent liquidity crunch.

"Now the question being posed," said BNP's Shah, "is whether the Fed can come and rescue another financial institution, can sovereign wealth funds come in and rescue Lehman?"

"These are the concerns the market is grappling with."