Aug. 3 (Bloomberg) -- Prices to protect corporate bonds against default fell for the first week since June as global financial markets stabilized.

Credit-default swaps on 10 million euros ($13.7 million) of debt included in the iTraxx Crossover Series 7 Index of 50 European companies dropped 2,000 euros to 393,000 euros at 2:30 p.m. in London and are down 49,000 euros for the week, according to JPMorgan Chase & Co. The contracts used to speculate on credit quality rose to the highest in at least three years at the start of the week.

The declining prices signal that traders have already accounted for the risks of the U.S. real-estate recession spreading to other parts of the global economy. Stocks in Europe are heading for gains this week and U.S. indexes rose three of the past four days. General Electric Capital Corp. raised $2 billion yesterday in its first U.S. sale of 30-year fixed-rate bonds since 2002.

``There was panic buying of credit protection earlier this week,'' said Suki Mann, a strategist at Societe Generale SA in London. ``Perhaps some sense of proportion is starting to prevail,'' said Mann, who recommends investors increase holdings of corporate debt.

Credit-default swaps gyrated during the week, with the iTraxx Crossover, Europe's benchmark indicator of corporate creditworthiness, peaking at 507,000 euros on July 30, the highest since the index began trading in 2004. The weekly decline reduced the cost to protect bonds for the first time since June 15.

Swap Gyrations

Less volatility may mean companies have an easier time raising money after more than 50 borrowers from Tyco Electronics Ltd. in Berwyn, Pennsylvania, to Moscow-based OAO Gazprom postponed or reworked debt offerings in the past six weeks. Bond sales dropped to $193 billion in July, the slowest month in two years, from $483 billion in June, according to data compiled by Bloomberg.

Traders say they're still concerned about credit quality deteriorating after American Home Mortgage Investment Corp. said yesterday that it will close and Accredited Home Lenders Holding Co. said it may need to seek bankruptcy protection. IKB Deutsche Industriebank AG required a bailout in Germany as its investments in U.S. subprime mortgage securities soured.

Credit-default swaps on Dusseldorf-based IKB traded at 90,000 euros today, down from about 120,000 euros at the same time last week, according to JPMorgan prices. The contracts cost about 10,000 euros a month ago.

Safe Havens

U.S. Treasuries, which have rallied for the past three weeks as investors sought safe havens from subprime mortgage losses, dropped this week, sending two-year yields up by 9 basis points to 4.58 percent.

``Even though we have seen a calmer day in credit, we are not necessarily out of the woods yet,'' said Jim Reid, head of fundamental credit research at Deutsche Bank AG in London.

Losses from U.S. mortgage defaults are spreading to higher rated securities. U.S. subprime-mortgage securities with the top AAA credit ratings from Standard & Poor's are becoming riskier, based on the rising cost to protect the notes using credit- default swaps. An index of credit-default swaps linked to 20 securities rated AAA and created in the second half of 2006 fell 2.6 percent to a new low of 89.69 yesterday, according to London- based administrator Markit Group Ltd.

``Once the higher rated tranches start to be affected, a whole different investor group is exposed to the sub-prime fallout,'' Reid said.

Credit-default swaps were designed to protect creditors against losses. Prices fall as the perception of credit quality improves and rise as creditworthiness deteriorates. The contracts pay the buyer the face value of the debt protected in return for the defaulted notes or the equivalent in cash.

The CDX North American Investment-Grade Index rose $3,500 to $77,500 per $10 million of debt today, down from $89,000 at the start of the week and a highpoint of $103,000 on July 30, according to Deutsche Bank AG.

To contact the reporter on this story: Hamish Risk in London hrisk@bloomberg.net

Last Updated: August 3, 2007 09:32 EDT