Nov. 4 (Bloomberg) -- The cost of protecting Australian corporate bonds from default fell after the central bank cut borrowing costs for the third time in as many months, fueling optimism fewer companies will fail to honor their debts.

Credit-default swap contracts on banks including National Australia Bank Ltd. and Commonwealth Bank of Australia led the decline after Reserve Bank of Australia Governor Glenn Stevens lowered the overnight cash rate target by 75 basis points to 5.25 percent.

``Lower interest rate means less stress from interest expenses. This in turn should translate to lower mortgage and corporate defaults,'' said Anita Yadav, head of credit and hybrid research at UBS AG in Sydney. ``Banks may be a little more confident in each others' credit quality if expected defaults are lower.''

The Markit iTraxx Australia index of credit-default swaps declined 10 basis points to trade at 235 as of 2:40 p.m. in Sydney, Citigroup Inc. data show. Contracts on the senior debt of National Australia Bank fell the same amount to 110 basis points and swaps on Commonwealth Bank dropped to 100.

The default swap index is a benchmark for protecting bonds against default and traders use it to speculate on changes in credit quality. A decrease indicates improving perceptions of credit quality while a basis point, or 0.01 percentage point, is worth $1,000 on a swap protecting $10 million of debt.

Weak Growth

Australia's gross domestic product rose 0.3 percent in the second quarter, the weakest growth in more than three years, as consumers cut spending for the first time since 1993. House prices fell 1.8 percent in the third quarter, the biggest drop since the late 1970s.

``The RBA's obviously more concerned about the economy than we thought,'' said Mark McCarthy, a trader at ABN Amro Holding NV in Sydney. ``It's just a case now of dealing with a recession and the RBA's trying to get ahead of the curve.''

The rate cut adds to last month's 1 percentage point reduction and exceeds the median estimate for a half-point decrease in a Bloomberg News economist survey. Central banks in China, Hong Kong, India, Japan and the U.S. have all lowered their benchmark interest rates in the past week.

Credit default swap indexes in Japan and the rest of Asia also fell as bank borrowing costs extended declines. The iTraxx Japan dropped 27 basis points to 223, Credit Suisse Group AG data show. The Asia index of 50 investment-grade borrowers outside Japan plunged 50 basis points to trade at 300, according to ICAP Plc prices.

Hong Kong's three-month interbank offered rate dropped 29 basis points today to a seven-week low of 2.79 percent. The comparable rate for U.S. dollar loans in Singapore fell 13 basis points to 2.80 percent, the lowest since July 2. Tokyo's rate declined 9.8 basis points to 0.791 percent, the biggest drop since December 1999.

Default swaps on the Markit CDX North America Investment Grade Index fell 5.5 basis points to 197.5 yesterday in New York, according to broker Phoenix Partners Group.

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

Last Updated: November 4, 2008 01:29 EST