By Oliver Biggadike Oct. 16 (Bloomberg) -- The cost of protecting Asia-Pacific bonds from default increased on concern a U.S. recession would spread across the world, sapping earnings and companies' ability to repay their debt. The Markit iTraxx Australia index of credit-default swaps rose 27.5 basis points to 225 at 2:28 p.m. in Sydney, Citigroup Inc. data show. The iTraxx Japan climbed 23 basis points to 208, according to Morgan Stanley, and the investment-grade benchmark for the rest of Asia advanced. Contracts on South Korean sovereign debt approached a record as the won slumped. ``If the U.S. has a recession we'll definitely be affected here,'' said Mark McCarthy, a credit trader for ABN Amro Holding NV in Sydney. ``Everybody's just very suspect of trading any emerging market or any name in Asia.'' The perceived risk of owning corporate and government debt in the region climbed for a second day after Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. is in a recession. U.S. credit markets reversed a two-day rally in New York yesterday on concern policy makers will be unable to boost economic growth even if the government's rescue plan is able to save the banking system. Credit-default swaps on the Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada increased 18 basis points to 195 yesterday, according to broker Phoenix Partners Group. In London, the iTraxx Europe index rose 8.5 basis points to 132.5, JPMorgan Chase & Co. prices show. The indexes are benchmarks for protecting against default and traders use them to speculate on changes in credit quality. Credit-default swaps pay the buyer face value in exchange for the underlying securities, or cash equivalent, if a borrower fails to adhere to its debt agreements. Higher prices indicate investor perceptions of credit quality have deteriorated. Korean Bond Risk The perceived risk of owning the South Korean government's external debt approached a record as the nation's currency and stocks slumped. Five-year credit-default swaps rose 60 basis points to trade at 350, according to ICAP Plc data. The price is equivalent to $350,000 annually to protect $10 million in debt. South Korea's won slumped the most since the International Monetary Fund bailed the nation out in December 1997 and stocks fell today on concern turmoil in financial markets will make it difficult for banks to service debt. ``The won is essentially doing what most Asian currencies are doing except as usual its move is amplified,'' said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. ``We're in a market where people are just selling anything they can sell in order to meet margin calls and pay investors demanding redemptions.'' Standard & Poor's said yesterday it may cut its credit ratings for Kookmin Bank and six other Korean financial companies because of difficulties they may face refinancing maturing debt. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt from default. To contact the reporter on this story: Oliver Biggadike in Tokyo at obiggadike@bloomberg.net

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