Jan. 24 (Bloomberg) -- The risk of owning European corporate bonds dropped to a record low as companies reduced borrowing, according to credit-default swap traders.

The cost of credit-default swaps based on 10 million euros ($13 million) of debt included in the benchmark iTraxx Crossover Index of 45 European companies closed at 193,500 euros, down from 198,500 euros, according to Deutsche Bank AG. A decline indicates credit risks are falling.

Investors are using credit-default swaps as an alternative to bonds as borrowing by European companies slumps to the lowest in ``living memory,'' according to Societe Generale SA credit analyst Guy Stear in Paris. Corporate bond issues total 3.4 billion euros so far this month, putting the market on course for a slower month than the record-low 9.7 billion euros sold in January 2005, Societe Generale data show.

``Investors are sitting on a lot of cash and are scrambling to get something into their portfolios,'' said Daniel Lamy, a credit strategist at JPMorgan Chase & Co. in London. The Crossover index could remain below 200,000 euros in the coming weeks if bond sales stay as low, he said.

Telefonica SA, Europe's second-largest phone company by market value, yesterday received double the orders for a sale of 1.5 billion euros of bonds, even after cutting the yield premium offered to investors twice.

Telefonica reduced the yield on its seven-year bonds to 49 basis points over the mid-swap rate, a benchmark for corporate borrowing, from an initial guidance of 51 to 52 basis points, according to bankers involved in the deal.

Safest to Riskiest

Investors drove down the cost for credit-default swaps based on companies deemed the safest and the riskiest.

Contracts on Alstom SA, the world's second-largest train maker, with the lowest perceived credit risk in the Crossover index, fell 1,700 euros to 45,800 euros today, according to prices on Bloomberg.

Credit-default swaps on German pay TV company Unity Media, whose debt is considered the riskiest, dropped to 450,000 euros from 470,000 euros, according to Deutsche Bank prices.

``Global liquidity is mainly at the root,'' said David Watts, a strategist at research firm CreditSights Inc. in London.

Companies are reducing bond sales after meeting most of their financing needs last year, according to Societe Generale's Stear. More corporate bonds will be repaid this month than at any other time this year, at 22 billion euros, Societe Generale said.

Growing Confidence

Bondholder confidence is growing worldwide amid rising corporate profits, growing consumer confidence and global economic expansion. Investors demand an extra 2.15 percentage points in yield on average to own European high-yield bonds instead of government notes, the smallest gap ever, according to data compiled by Merrill Lynch & Co. The spread has narrowed by 1.31 percentage point from a year ago and is below its five-year average of 5.41 percentage points, Merrill data show.

Company executives are the most confident in at least a decade, according to a PricewaterhouseCoopers LLP survey published to coincide with the start of the World Economic Forum's annual meeting in Davos, Switzerland today. Ninety-two percent of 1,084 executives questioned said they are ``confident'' or ``very confident'' about their prospects this year, That's the highest reading since the firm introduced the survey 10 years ago.

Davos Concerns

Economists and executives at Davos warned surging demand for derivatives, including credit-default swaps, is making financial markets more vulnerable to any slowdown in the global economy.

Nouriel Roubini, chairman of Roubini Global Economics, said it isn't known whether derivatives are ``diffusing risk or concentrating it'' at a few financial companies.

Credit-default swaps are based on bonds and the cost of contracts reflect a company's ability to repay debt. Contracts on the bonds of more than 3,000 companies worldwide are actively traded, according to Markit, a London-based provider of prices.

Sellers of credit-default swaps receive 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.

The iTraxx Crossover Index Series 6 includes companies with the lowest investment-grade and highest non-investment grade rankings.

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

Last Updated: January 24, 2007 12:37 EST