March 4 (Bloomberg) -- The cost of protecting U.S. corporate bonds from default reached a record as Federal Reserve Chairman Ben S. Bernanke warned that the housing slump may worsen and urged lenders to forgive more delinquent mortgages.

Credit-default swaps on the benchmark Markit CDX North America Investment Grade Index rose 1 basis point to 164.5 and earlier traded at a record 171, according to Deutsche Bank AG. Contracts on Citigroup Inc., the biggest U.S. bank by assets, also jumped to a record. Washington Mutual Inc., the largest savings and loan, and Countrywide Financial Corp. climbed the most in almost two months.

Bernanke's comments helped fuel speculation that $181 billion in bank writedowns and losses will deepen, causing more turmoil in credit markets. Citigroup, which has marked down assets by $19.9 billion and taken $2.5 billion in credit losses since the beginning of 2007, may have $15 billion of writedowns this quarter on mortgage-linked debt, Merrill Lynch & Co. analyst Guy Moszkowski said today in a note.

``The outlook for continued credit despair remains firmly entrenched for at least the near term, and there's no catalyst really to change that perception,'' said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management.

Bernanke today said home-loan delinquencies and foreclosures ``likely will continue to rise for a while longer'' and urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.

Subprime Collapse

The CDX index has more than doubled this year and contracts tied to banks, mortgage lenders and securities firms have soared to records, or near records, as credit investors bet that losses sparked by the collapse of U.S. subprime mortgage securities will spread to other areas of the credit markets.

Credit-default swaps tied to New York-based Citigroup rose 10 basis points to 195 basis points and earlier reached a record 200, according to broker Phoenix Partners Group.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

Contracts on Seattle-based Washington Mutual climbed 35 basis points to 535 basis points, Phoenix Prices show. Contracts on Calabasas, California-based Countrywide, the largest U.S. mortgage lender, rose 55 basis points to 535.

Merrill Lynch

Contracts on Merrill Lynch, the securities firm that has taken almost $25 billion in asset writedowns and credit losses, also increased, climbing 20 basis points to 235, according to Phoenix.

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.

Banks and securities firms have been tightening lending as their losses mount and as investors flee some debt markets, heightening concern that the U.S. economy will enter a recession and corporate defaults will soar.

About one-third of U.S. banks increased their standards on commercial and industrial loans, according to the Federal Reserve's quarterly survey of senior loan officers released Feb. 4.

The Markit iTraxx Financial index tied to the subordinated bonds of 25 European banks and financial institutions rose 5 basis points to 198, close to a record 209, according to JPMorgan Chase & Co. prices. The benchmark Markit iTraxx Europe index linked to 125 companies with investment-grade ratings was unchanged at 130 basis points, near a record 139 reached yesterday.

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

Last Updated: March 4, 2008 17:32 EST