Nov. 3 (Bloomberg) -- The cost of protecting corporate bonds from default fell to the lowest in two weeks as central banks around the world cut interest rates, easing constraints in the credit markets.

Credit-default swaps on benchmark indexes in the U.S. and Europe dropped as the rate banks charge to lend to each other in dollars fell to the lowest since the day before Lehman Brothers Holdings Inc. filed for bankruptcy and triggered a lockdown in credit markets. Contracts linked to American Express Co., the largest U.S. credit-card company by purchases, fell to the lowest in almost five weeks. Contracts on banks including Morgan Stanley held near the lowest since Lehman's Sept. 15 filing.

Investors are betting the European Central Bank and the Bank of England will lower borrowing costs this week after the Reserve Bank of India reduced its benchmark for the second time in two weeks on Nov. 1. The U.S. Federal Reserve cut its rate by half a percentage point on Oct. 29 to 1 percent, matching a half-century low.

``The now widely expected interest-rate cuts should reassure investors that the authorities around the world are stepping up their efforts to combat the global recession,'' said Valentin Marinov, a London-based strategist at Dresdner Kleinwort.

North America Index

Credit-default swaps on the Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the U.S. and Canada fell 5.5 basis points to 197.5 basis points as of 3:51 p.m. in New York, according to broker Phoenix Partners Group. In London, the benchmark Markit iTraxx Europe index dropped 10 basis points to 145, according to JPMorgan Chase & Co. prices.

Contracts on New York-based American Express dropped 17.5 basis points to a mid-price of 467.5 basis points, according to CMA Datavision. Swaps on Morgan Stanley, also based in New York, fell 2 basis points to 420 basis points, CMA data show.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline signals the opposite.

American Express

Credit swaps on American Express were the most actively traded in the U.S. last month, according to a report today by broker GFI Group Inc., which matches credit swap trades between banks. Merrill Lynch & Co. and Morgan Stanley were the second- and third-most traded. In Europe, contracts on OAO Gazprom, Russia's biggest energy company, were most active.

Contracts on HeidelbergCement AG, Germany's biggest cement maker, declined 108 basis points to 1,066 basis points and British Energy Group Plc fell 21 basis points to 230 basis points, CMA Datavision prices 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.

Credit-default swaps on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings decreased 24 basis points to 761, JPMorgan prices show.

To contact the reporters on this story: Abigail Moses in London Amoses5@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net

Last Updated: November 3, 2008 16:31 EST