March 4 (Bloomberg) -- The cost to protect Australian corporate bonds against default rose to a record, while funding rates for the nation’s banks declined.

The Markit iTraxx Australia index was quoted 10 basis points higher at 415 basis points as of 9:55 a.m. in Sydney, ABN Amro Holding NV data show. The benchmark is tied to the debt of 25 companies, including Qantas Airways Ltd. and BHP Billiton Ltd.

The rate Australian banks charge each other for three-month loans advanced 17 basis points to 3.36 percent, Australian Financial Markets Association data show. The difference between that yield and the overnight swap rate shrank to 45 basis points from 61 points yesterday. The spread, a measure of cash scarcity, averaged 11 points in the five years before the credit crunch started in August 2007. A basis point is 0.01 percentage point.

The London interbank offered rate, or Libor, for three- month dollar loans was little changed yesterday at 1.27 percent, the highest since Jan. 8, the British Bankers’ Association said.

The Markit iTraxx Australia index is a benchmark for protecting investors against default and traders use it to speculate on changes in credit quality. An increase in the price suggests deteriorating investor perceptions of credit quality and a decrease indicates improvement.

Credit-default swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements. A basis point is worth $1,000 on a swap that protects $10 million of debt from default.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

Last Updated: March 3, 2009 18:22 EST