Feb. 12 (Bloomberg) -- The cost of protecting Japanese corporate bonds from default rose to a record as the world’s second-largest economy battles a worsening recession.

The Markit iTraxx Japan index of credit-default swaps on the debt of 50 investment-grade borrowers rose 25 basis points from Feb. 10 to 455 at 12:55 p.m. in Tokyo, BNP Paribas SA prices show.

“The credit profile of the Japanese corporate sector has deteriorated quite substantially in the past couple of months, and the situation could get worse even though companies are trying to cut costs,” said Yasunobu Katsuki, chief credit strategist for Japan at Mizuho Securities Co. in Tokyo.

Japan’s economy may have shrunk at an annual pace of more than 10 percent last quarter amid an unprecedented collapse in exports and production. Gross domestic product for the three months ended Dec. 31 contracted an annualized 11.7 percent, the sharpest slowdown since the 1974 oil crisis, according to the median estimate of 24 economists surveyed by Bloomberg News.

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 1.5 basis points to 356 at 11:54 a.m. in Hong Kong, according to ICAP Plc. The region’s high-yield benchmark was quoted unchanged at 1,150 basis points, according to Barclays Capital prices. Japanese markets were closed yesterday for a public holiday.

The Markit iTraxx Australia index dropped 7.5 basis points to 320 at 2:55 p.m. in Sydney, Citigroup Inc. data show.

Contracts on London-based Rio Tinto Group fell 75 basis points to 525, Citigroup prices show. The world’s third-biggest mining company halted its shares from trading in New York and Sydney before an expected announcement on talks to raise as much as $20 billion from Aluminum Corp. of China.

“The deal would be a significant positive for Rio’s credit profile, likely resulting in an S&P rating upgrade to BBB+” from BBB, Deutsche Bank AG’s Sydney-based analysts Gus Medeiros, Colin Tan, and Ken Crompton wrote in a research note today. The German bank revised Rio’s default swaps target to 450 basis points from 500.

Woori Risk

The cost to protect the subordinated debt of Woori Bank for five years fell 2.5 to 822.5 basis points, Barclays Capital prices show.

The contracts on South Korea’s second-biggest bank widened 100 basis points to 830 yesterday, according to BNP Paribas, after it said it won’t exercise an option to redeem $400 million of notes because it would be more expensive to refinance them.

Credit-default swaps on the Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada fell 2.5 basis points to 193.5 yesterday, according to Barclays Capital. Contracts on the Markit iTraxx Europe index of 125 companies with investment-grade ratings declined 0.5 basis points to 152, according to JPMorgan Chase & Co.

Credit-default swap indexes are benchmarks for protecting bonds against default, and traders use them to speculate on changes in credit quality. The swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements.

A basis point, or 0.01 percentage point, is worth $1,000 on a swap protecting $10 million of debt.

To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net

Last Updated: February 11, 2009 23:21 EST