Oct. 24 (Bloomberg) -- The cost of protecting corporate bonds from default surged to a record as global stock markets tumbled and commodity prices fell.

Credit-default swaps protecting against a default by companies including Bayer AG, Germany's largest drugmaker, French automaker PSA Peugeot Citroen and U.S. newspaper publisher New York Times Co., soared to records. A benchmark European index climbed above 900 basis points for the first time as the U.K. economy shrank more than forecast.

``The fear is truly palpable among investors we are speaking to,'' Kenneth Hackel, head of fixed-income strategy at RBS Greenwich Capital Markets, said today in a note to clients. ``The non-stop volatility overwhelms any good news on the margin as investors assume the next sharp move is imminent and will be negative.''

The slump has been driven by hedge funds dumping assets amid record losses and investor withdrawals and concern that governments from Argentina to Pakistan may default in a global recession. Toyota Motor Corp., the world's second-largest automaker, reported its first sales decline in seven years.

Credit-default swaps on the Markit CDX North America Investment Grade Index, tied to 125 companies in the U.S. and Canada including aluminum producer Alcoa Inc. and package shipper United Parcel Service Inc., increased 14 basis points to 225 basis points, according to Deutsche Bank AG. It earlier was quoted at a record 240, prices from Phoenix Partners Group show.

New York Times

Contracts on Europe's Markit iTraxx Crossover Index of mostly high-yield, high-risk companies soared as much as 107 basis points to an all-time high of 920 before dropping back to 875, according to JPMorgan Chase & Co. prices.

New York Times contracts jumped 78 basis points to 600 basis points, according to CMA Datavision. Standard & Poor's yesterday lowered the newspaper publisher three grades below investment quality on concern that the slowing economy will sap revenue after advertising sales slid 16 percent in the third quarter.

Contracts on Peabody Energy Corp., the largest U.S. coal producer, jumped 65 basis points to a record 640, CMA data show. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

American International Group

Credit swaps on American International Group Inc., the insurer bailed out by the U.S. government last month, climbed deeper into distressed levels. Traders demanded 42 percentage points upfront and 5 percentage points a year, up from an initial price of 38 percentage points yesterday, CMA data show. That means it would cost $4.2 million initially and $500,000 a year to protect $10 million in AIG debt for five years.

AIG has borrowed about $90 billion from the government and may need more than the $122.8 billion available, Chief Executive Officer Edward Liddy said Oct. 22.

Bayer contracts rose 29 basis points to 134, CMA data show. Swaps on Peugeot, Europe's second-biggest carmaker, jumped 41 to 510 after Chief Executive Officer Christian Streiff said the company will make ``massive production cuts'' in the quarter. Contracts protecting against a default by Renault SA, which posted a 2.2 percent revenue decline, increased 35 to 525, CMA data show. Volvo AB jumped 106 to 459 after the world's second- largest maker of heavy trucks cut its industry growth outlook.

Slump Hurts Automakers

The U.K. economy contracted 0.5 percent in the third quarter, evidence that Britain is in the grip of its first recession since 1991. Automakers are feeling the full force of the global economic slump, with Peugeot posting third-quarter revenue down 5.2 percent.

The upfront cost to protect against a default by General Motors Corp., the biggest U.S. automaker, rose 2 percentage points to 67 percentage points, CMA and Phoenix prices show. The GM swaps price implies a 93 percent chance of default in the next five years, according to a JPMorgan valuation model. That assumes investors could recover 15 cents on the dollar in GM failure.

Credit swaps on a unit of hedge-fund manager Citadel Investment Group, traded at 30 percentage points upfront today, according to Phoenix. That's unchanged from a mid-price of 30 last week. Citadel's biggest hedge fund fell as much as 30 percent this year because of losses on convertible bonds, stocks and corporate debt, two people familiar with the Chicago-based firm said earlier this month.

European iTraxx

Credit-default swaps on the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose as much as 31.5 basis points to 193, before falling back to 185, JPMorgan prices show. The previous record of 172 basis points was set in March before the Federal Reserve backed the bailout of Bear Stearns Cos. by JPMorgan.

The cost of protecting high-yield, high-risk corporate loans also soared.

The price of the Markit LCDX index linked to U.S. leveraged loans, which falls as sentiment worsens, dropped 1.35 percentage points to a mid-price of 84.5 percent of face value, according to Goldman Sachs Group Inc.

Stocks tumbled around the world, with the Standard & Poor's 500 Index dropping as much as 6.1 percent. Crude oil, copper and gold led a drop in commodities, extending a record quarterly decline, on expectations an economic slump will sap demand for raw materials. The pound dropped below $1.53 in its biggest drop in at least 37 years. The ruble fell to a 2 1/2-year low as Russia's biggest export, oil, dropped below $65 a barrel to a 16- month low.

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Michael Shanahan in London mshanahan3@bloomberg.net

Last Updated: October 24, 2008 18:09 EDT