July 26 (Bloomberg) -- The risk of owning bonds of Wall Street firms surged as concerns escalated that investment banks will be hurt by rising losses from subprime mortgages and a freeze in demand for corporate debt.

Credit-default swaps on $10 million of Goldman Sachs Group Inc. bonds jumped as much as $18,000 to a record $85,000, according to broker Phoenix Partners Group in New York. Bear Stearns Cos. credit swaps surged as much as $29,000 to $110,000, also a new high. Lehman Brothers Holdings Inc. climbed as much as $24,000 to $104,000.

``You have a stampede of the animals away from the watering hole,'' said Scott MacDonald, director of research at Aladdin Capital Management in Stamford, Connecticut, which manages about $20 billion in assets. ``Right now, everything that smacks of financial risk is backing out through the door.''

Risk premiums surged as Absolute Capital Group Ltd., an Australian hedge fund, suspended withdrawals from two funds after forecasting losses on U.S. subprime mortgages. The firms' credit swaps extended increases from yesterday when banks including Goldman were stuck with $20 billion in loans they couldn't sell to finance buyouts of Auburn Hills, Michigan-based automaker Chrysler and Europe's Alliance Boots Plc.

An increase in the five-year contracts on the bonds, used to bet on the companies' creditworthiness, signals deterioration in investor confidence.

Risk premiums for Wall Street firms have also risen because of concern earnings may be hurt by investments in, or ties to, securities backed by subprime mortgages, some of which have lost at least half their value as defaults among the riskiest home loan borrowers surge.

Deutsche, WestLB

Default swaps on Deutsche Bank AG, Germany's biggest bank, rose 9,000 euros to 35,000 euros, according to Royal Bank of Scotland, from about 15,000 euros at the beginning of the month.

Deutsche Bank was one of eight banks stuck with 5 billion pounds ($10 billion) of loans for Kohlberg Kravis Roberts & Co.'s purchase of pharmacy chain Alliance Boots.

Credit swaps on JPMorgan Chase & Co., which is helping finance both the Chrysler and Boots deals, rose as much as $25,000 to $75,000, Phoenix prices show.

Credit-default swaps based on 10 million euros of the debt of WestLB, Germany's third-biggest state lender, surged 23,000 euros to 58,000 euros, according to data compiled by CMA Datavision in London.

The rising risk perceptions of brokers propelled indexes in Europe and the U.S. An index that tracks corporate credit risk among U.S. investment-grade companies surged to the highest since June 2005 and a European index had its biggest one-day jump since it started trading in June 2003.

The CDX North America Investment Grade Index of 125 companies rose $7,250 to $64,000 as of 10:02 a.m. in New York, according to Deutsche Bank AG.

In Europe, the iTraxx Investment Grade index, comprised of 125 companies, including ABN Amro, Deutsche Bank and HSBC Bank Plc, rose 6,000 euros to 42,000 euros.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Hamish Risk in London hrisk@bloomberg.net

Last Updated: July 26, 2007 10:08 EDT