The risk of companies defaulting rose after reports showing contraction in the U.S. service industry and a tightening of lending standards by banks.
Benchmark credit-default swap indexes in the U.S. and Europe reached the highest in two weeks, a sign of eroding investor confidence in corporate creditworthiness. Contracts tied to the bonds of student lender SLM Corp. rose the most in two weeks after Standard & Poor's cut its credit rating two levels. Real- estate broker Realogy Corp. moved further into distressed levels on concern it won't be able to weather the housing-market slump.
Financial companies are reluctant to lend because they may face losses exceeding $265 billion on securities linked to subprime mortgages, Standard & Poor's said last week. Banks also are saddled with about $220 billion of high-yield, high-risk loans and bonds, according to Barclays analysts. Most of the debt was committed to fund leveraged buyouts.
"If lending standards do not loosen then this is very bad news for the rest of the economy," said Jim Reid, head of fundamental credit research at