Oct. 30 (Bloomberg) -- The cost of protecting Asia-Pacific bonds from default tumbled after the Federal Reserve increased cross-border funding and the U.S., China, Hong Kong and Taiwan cut interest rates to boost economic growth.

The benchmark index of credit risk for investment-grade borrowers in Asia outside Japan fell the most since it was created in September 2007. The Markit iTraxx Asia credit-default swap index of 50 borrowers, including Thailand and Hong Kong's Hutchison Whampoa Ltd., fell 110 basis points to 450, according to ICAP Plc data as of 3:22 p.m. in Hong Kong.

``The CDS market has been overly aggressive in its pricing of default risks,'' said Brett Williams, an analyst at BNP Paribas SA in Hong Kong. ``This is a credit-positive development that we expect will lend firm support to our trading call to sell CDS on Asian sovereigns.''

The Fed agreed yesterday to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore in a bid to boost the availability of dollars and thaw credit markets frozen by Lehman Brothers Holdings Inc.'s September bankruptcy. The Fed also cut its benchmark interest rate by half a percentage point to 1 percent, matching a half-century low, while China cut rates for the third time in two months.

Hong Kong shares rose today, driving the Hang Seng Index to its steepest three-day gain in 35 years, after the Hong Kong Monetary Authority lowered its base rate to 1.5 percent from 2 percent. Taiwan also cut rates and Japanese government bonds gained for a second day on speculation the central bank will reduce rates tomorrow to help revive consumer spending and economic growth.

Australia, Japan

The iTraxx Australia index was quoted 40 basis points lower at 270 at 1:50 p.m. in Sydney, Citigroup Inc. data show. The benchmark is tied to the debt of 25 companies, including Qantas Airways Ltd. and BHP Billiton Ltd. Japan's benchmark fell 43 basis points to 247, according to Credit Suisse Group.

Default protection costs on South Korean sovereign bonds dropped by the most in more than four years on optimism the Fed's swap program will help local banks refinance their dollar- denominated debt.

Five-year credit-default swaps on the country's external debt fell 130 basis points to 435, according to a Bloomberg survey of three dealers. The decline is the most since CMA Datavision began tracking the contracts in 2004.

``The swap program will address lingering concerns of investors about the adequacy of Korea's foreign reserves,'' said Kwon Goohoon, an economist with Goldman Sachs Group Inc. in Seoul. The extra funding and a government guarantee ``will also likely help facilitate rollover of existing foreign debts of Korean banks.''

Stocks Soar

Japan's Nikkei 225 Stock Average climbed 10 percent to 9,029.76 in Tokyo. South Korea's Kospi index gained 12 percent, and a surge in index futures triggered a halt in program trading.

Credit-default swaps on the Markit CDX North America Investment Grade Index, a benchmark gauge of credit risk linked to the bonds of 125 companies in the U.S. and Canada, fell 4.5 basis points to 207.5 yesterday in New York, according to broker Phoenix Partners Group.

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.

Credit-default swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements. Prices declines as perceptions of credit quality improve.

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

Last Updated: October 30, 2008 04:03 EDT