Dec. 2 (Bloomberg) -- The cost of protecting corporate bonds from default soared to a record on concern central banks are reaching the limit of what they can do to ease the severity of the global economic recession.

Credit-default swaps on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 18 basis points to 956, according to JPMorgan Chase & Co. prices at 9:36 a.m. in London. The Markit iTraxx Europe index of 125 companies with investment-grade ratings climbed 3.5 basis points to 191.5 and earlier traded at a record 198.

“The economic slump is too hard for anyone to fix right away,” said Tetsushi Nagato of Schroder Investment Management Japan Ltd., whose parent manages the equivalent of $205 billion.

Australia’s central bank cut its benchmark interest rate 1 percentage point today, extending the biggest round of reductions since the 1991 recession. Investors are speculating the European Central Bank and Bank of England will lower rates this week, while the U.S. Federal Reserve may reduce its benchmark to zero, economists said.

The iTraxx Australia index of credit-default swaps jumped 35 basis points to 375 in Sydney, Citigroup Inc. prices show. In Tokyo, Japan’s benchmark index rose 35 to 370, according to Morgan Stanley. Bank of Japan Governor Masaaki Shirakawa said after an emergency meeting today that cutting the benchmark interest rate from 0.3 percent could impede the function of the money market.

“The BOJ is likely to implement quantitative easing again, maybe next year,” Nagato said. “It will be like a global quantitative easing.”

Quantitative Easing

Quantitative easing refers to the period between 2001 and 2006 when Japan’s central bank kept interest rates close to zero and flooded the financial system with cash. The Fed has effectively adopted a similar policy already, Kazumasa Iwata, former deputy governor of the Bank of Japan, said in a speech on Nov. 26.

Bank of England Governor Mervyn King openly discussed the possibility of zero interest rates for the first time on Nov. 25. The European Central Bank will cut its benchmark rate to 1.5 percent next year, according to the median of 25 forecasts in a Bloomberg News survey, with Citigroup Inc. saying that a move to zero is possible. The Swiss National Bank has cut its short-term rate to 0.1 percent.

Non-bank lenders and real-estate companies are among those facing the most financing difficulty as credit markets seize up and investors become more reluctant to invest in riskier assets, said Nagato.

‘It’s Ugly’

Three-year credit-default swaps on Acom Co., Japan’s largest consumer lender by market value, traded 130 basis points higher at 860, according to Credit Suisse data. The price to protect against an Acom default is equivalent to 860,000 yen ($9,180) annually per 10 million yen of bonds.

“The price movements are so rapid,” Nagato said. “It’s ugly, a small portion of the market can determine the price.’‘

Corporate bond sales in Japan plunged 45 percent in November from a year ago, data compiled by Bloomberg show. NTT DoCoMo Inc. and Nippon Steel Corp. paid higher yield premiums last week when they sold the first bonds outside the public works sector since Oct. 15. The shortage of credit drove bankruptcies among publicly traded companies to a record 30 this year, after property developer Morimoto Co. collapsed last week.

iTraxx Asia

The Markit iTraxx Asia credit-default swap index of 50 investment-grade borrowers outside Japan, including Thailand and Hutchison Whampoa Ltd., advanced 35 basis points to 425 at 10:06 a.m. in Hong Kong, according to ICAP Plc prices.

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. An increase indicates a deterioration in the perception of credit quality; a decline, the opposite.

Contracts on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada increased 23 basis points to 260 at the close of trading in New York, according to Deutsche Bank AG.

To contact the reporters on this story: Aaron Pan in Hong Kong at Apan8@bloomberg.netAbigail Moses in London Amoses5@bloomberg.net

Last Updated: December 2, 2008 04:52 EST