Australian Bond Risk Rises to Record

Australian Bond Risk Rises to Record as Credit Crisis Spreads

By Oliver Biggadike

Oct. 7 (Bloomberg) -- The cost of protecting investors from Australian corporate bond defaults increased to a record on concern the U.S. government's bank rescue package won't do enough to unlock global money markets as the credit crisis spreads.

European governments are rushing to shore up their banks after the leaders of the four biggest European Union economies were unable to agree on a joint effort at a weekend meeting. BNP Paribas SA agreed to buy Fortis's units in Belgium and Luxembourg for 14.5 billion euros ($19.6 billion) after a government rescue failed. Denmark and Germany promised to guarantee all their countries' bank deposits.

``Credit markets remain extremely weak and fragile around the globe, with the developments in Europe the major contributor for the recent weakness,'' Gus Medeiros, a credit analyst at Deutsche Bank AG in Sydney, wrote in a research note today. ``We expect the market to remain very volatile and thin in the next few days.''

The Markit iTraxx Australia index rose 34 basis points to 245 at 8:39 a.m. in Sydney, according to prices from Citigroup Inc. The price of the contracts, tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd., is the highest since the iTraxx benchmarks started in 2004. Sydney trading desks were closed yesterday for a holiday.

The Markit iTraxx Japan index rose 9 basis points to 207 at 8:56 a.m. in Tokyo, Morgan Stanley prices show.

U.S. credit-default swaps rose yesterday in New York, with the Markit CDX North America Investment Grade Index climbing 10 basis points to 176, according to broker Phoenix Partners Group. Contracts on Goldman Sachs Group Inc. climbed 58.5 basis points to 460.5, according to CMA Datavision prices.

The indexes are benchmarks for protecting bonds against default and traders use them to speculate on changes in credit quality. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt from default.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if a borrower fails to adhere to its debt agreements.

To contact the reporters on this story: Oliver Biggadike in Tokyo at obiggadike@bloomberg.net.