Nov. 6 (Bloomberg) -- The cost of protecting corporate bonds from default rose after a rating downgrade at Ambac Financial Group Inc. triggered concern investors may be forced to sell securities covered by the bond insurer.

Credit-default swaps on the Markit iTraxx Europe index of 125 investment-grade companies rose 6.5 basis points to 139, according to JPMorgan Chase & Co. prices at 10:08 a.m. in London. In Tokyo, the benchmark iTraxx Japan index increased 15 basis points to 230, Morgan Stanley prices show.

Ambac's insurance financial strength rating was reduced four steps to Baa1 by Moody's Investors Service citing the company's ``diminished business and financial profile.'' The cut will trigger downgrades to securities guaranteed by the New York-based company around the world and may force investors to dump assets, according to Royal Bank of Scotland Group Plc analysts.

``We are starting to get to the point where there may be some technical pressure from forced selling, which could push spreads wider,'' Michael Cox, a London-based credit strategist at RBS, wrote in a note to investors today. ``The future for Ambac is now pretty bleak.''

Ambac's guaranteed investment contracts require it to terminate transactions or post collateral if it is downgraded. That could leave the company with a cash shortfall of at least $2.8 billion, based on figures released yesterday after the company reported a $2.43 billion net loss.

Third-Quarter Charge

The New York-based company also took third-quarter charge of a $2.7 billion to reflect a decline in the value of securities it had guaranteed using credit-default swaps. That type of mark-to- market loss, which doesn't always indicate an expected cash payment, this time forced the bond insurer to set aside about $2.5 billion to make good on those contracts, the company said in a statement.

The cost of default protection rose as stocks fell in Europe and Asia and U.S. index futures dropped as disappointing results from Toyota Motor Corp., Cisco Systems Inc. and Adidas AG deepened concern the economic slump will stifle profit growth.

Bank of England Governor Mervyn King may need to lower benchmark interest rates to zero from the current level of 4.5 percent as the financial crisis tears through Britain's economy, according to economists including Citigroup Inc.'s Michael Saunders. The bank will cut by 0.5 percent later today, according to 45 of the 60 economists in a Bloomberg News survey.

Credit-default swaps are used to protect against or speculate on default. They pay the buyer face value in exchange for the underlying securities, or cash equivalent, if a borrower fails to adhere to its debt agreements. A basis point, or 0.01 percentage point, is worth 1,000 euros on a swap that protects 10 million euros ($1.29 million) of debt from default.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 12 basis points to 740, JPMorgan prices show.

The Markit CDX North America Investment Grade Index of credit-default swaps linked to 125 companies in the U.S. and Canada increased 6 basis points to 187 at the close of trading in New York, according to Deutsche Bank AG.

To contact the reporter on this story: Abigail Moses in London Amoses5@bloomberg.net

Last Updated: November 6, 2008 05:28 EST