In These New Times

Abigail Moses

Sept. 17 (Bloomberg) — The cost to hedge against losses on U.S. government debt rose to a record after the Federal Reserve rescued American International Group Inc. to avert the worst financial collapse in history.

Benchmark 10-year credit-default swaps on Treasuries increased 4 basis points to 30 today, according to BNP Paribas SA prices. The contracts have risen from below 2 basis points at the start of the credit crisis in July 2007 and are more than double those on government bonds sold by Austria, Finland or Sweden.

The U.S. Treasury pledged an $85 billion loan for AIG just 10 days after committing as much as $200 billion to prevent a collapse of mortgage companies Fannie Mae and Freddie Mac. The U.S. budget deficit will grow next year to $438 billion, the Congressional Budget Office said Sept. 9, making it harder for President George W. Bush‘s successor to either cut taxes or increase spending.

“The latest bailout comes at the expense of the U.S. taxpayer,” Tim Brunne, a Munich-based credit strategist at UniCredit SpA, wrote in a research note today. “It cannot be expected that AIG will survive in its present form.”

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality; a decline, the opposite.

Contracts on Treasuries are quoted in euros and a basis point on a credit-default swap protecting 10 million euros ($14.1 million) of debt from default for 10 years is equivalent to 1,000 euros a year.

U.K. Government Debt

Credit-default swaps on U.K. government debt were unchanged at 31 basis points, BNP prices show. Contracts on German bunds were unchanged at 14 basis points, and swaps on French government debt were little changed at 18, CMA Datavision prices show.

The cost of protecting corporate bonds from default rose, with contracts on the Markit CDX North America Investment Grade index of 125 companies in the U.S. and Canada increasing 5 basis points to 205 basis points as of 11:46 a.m. in New York, according to broker Phoenix Partners Group.

In Europe, the Markit iTraxx Financial Index of 25 European banks and insurers climbed 15 basis points to 150, according to JPMorgan Chase & Co. The Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 7 basis points to 145.

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