Feb. 27 (Bloomberg) -- The risk of owning U.S. and European corporate bonds rose the most in 18 months on concern rising mortgage defaults in the U.S. and a slump in Chinese stocks will hurt creditworthiness, according to credit-default swap traders.

Contracts based on 10 million euros ($13 million) of debt included in the iTraxx Crossover Index of 45 European companies jumped 21,000 euros to 201,500 euros at 4:30 p.m. in London, according to Deutsche Bank AG. The index has increased from a record low of 169,000 euros on Feb. 22. The U.S. CDX index surged the most in seven months.

``The Crossover Index has turned into a gauge of fear,'' said Peter Duenas-Brckovitch, head of credit trading at Lehman Brothers Holdings Inc. in London. ``Concerns about sub-prime mortgages and a slump in China stocks have fueled the fear, which until a few weeks ago didn't seem to exist.''

Credit-default swaps are based on corporate bonds and loans and used to speculate on a company's ability to repay debt. An increase indicates a higher risk of default.

Investors are concerned rising delinquencies on the riskiest mortgages in the U.S. may spread to other parts of the home-loan market, hurting consumer confidence. The biggest plunge in Chinese shares in a decade sparked a global stock selloff on speculation a government crackdown on investments financed with borrowed money may cool demand from the world's fastest-growing major economy.

Credit-default swaps based on $10 million in bonds tied to the Dow Jones CDX North America Crossover Index rose $13,500 to $128,500, according to Deutsche Bank AG. The index has climbed from a record low of $107,500 on Feb. 22.

Stocks Slump

European shares fell the most in eight months, while the Standard & Poor's 500 Index in the U.S. declined the most since November.

Credit-default swaps were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities should the company fail to meet its debt agreements.

In the U.S., the risk of owning low-rated subprime mortgage bonds rose for an eighth day as measured by an index of credit- default swaps on 20 securities rated BBB- and created in the second half of 2006. The index has fallen by more than a third since trading started Jan. 18, according to Markit Group Ltd.

Delinquencies and defaults on subprime loans in securities underlying ABX indexes continued to rise in January, though at a slower pace, according to a Banc of America Securities LLC report today.

The ABX-HE-BBB- 07-1 index fell 6.3 percent to 63 from 67.27 yesterday, according to New York-based derivatives broker GFI Group Inc.

Investors who sell credit-default swaps are paid a quarterly premium, typically for five years. In return they guarantee to pay the buyer 10 million euros should the company fail to adhere to debt agreements. The seller gets the defaulted notes.

To contact the reporters for this story: Hamish Risk in London hrisk@bloomberg.net;

Last Updated: February 27, 2007 11:51 EST