By John Detrixhe and Shannon D. Harrington

Jan. 22 (Bloomberg) — The cost to protect against defaults on U.S. corporate bonds rose this week by the most since June as President Barack Obama proposed reigning in banks and Chinese regulators said credit growth would be restricted this year.

Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, climbed 12.7 basis points this week to 96.2 basis points, according to CMA DataVision prices. An increase in the index signals a decline in investor confidence.

The index has risen eight straight days, the longest stretch since June 2008, on signs of fresh risks to global economic growth. Chinese regulators told some banks on Jan. 20 to trim lending, and the next day Obama proposed limiting the size and trading activities of U.S. financial companies as a way to reduce risk-taking. Last week Moody’s said the Greek economy faces a “slow death” from deteriorating finances.

“Markets have been wobbling from one bad headline to the next,” Citigroup Inc. analysts led by Mikhail Foux wrote today in a research report. “We view current market weakness as temporary and expect the bull trend in credit to resume in due time.”

Credit-default swaps on Greek government debt surged to a record 356 basis points this week before falling to 340 basis points, CMA prices show. China reported fourth-quarter growth that exceeded 10 percent, fueling speculation the central bank will have to raise interest rates, which could damp expansion in a country that has helped power the global economic recovery.

Increased Uncertainty

The Obama administration’s call for regulation added to uncertainty in U.S. markets because of a lack of “specifics,” said Brian Yelvington, head of fixed-income strategy at Knight Libertas LLC, a broker-dealer in Greenwich, Connecticut. Obama’s proposal would restrict banks from running proprietary trading operations or investing in hedge and private-equity funds.

“Tinkering with the legislative bounds under which banks operate can have pretty far-reaching effects,” Yelvington said. “The market hates uncertainty.”

The banks most affected by the proposed rules “would appear to be the surviving broker-banks,” Goldman Sachs Group Inc. and Morgan Stanley, analysts at debt-research firm CreditSights Inc. wrote today in a report. Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. would be affected “to a somewhat lesser extent due to their more diversified banking operations,” the analysts wrote.

Credit swaps linked to Goldman Sachs Group Inc. rose 14 basis points to a mid-price of 134.5 basis points, and contracts on Morgan Stanley increased 10 basis points to 143 basis points, according to CMA.

Bank Swaps Rise

Swaps on Citigroup gained 9 basis points to 199 basis points and those on JPMorgan advanced 8 basis points to 74 basis points.

The difference between the cost to buy protection on the bonds of Bank of America Corp. and those of its Merrill Lynch brokerage unit reached the widest level in six months.

Credit-default swaps on Merrill Lynch jumped 15 basis points to 150 basis points, according to broker Phoenix Partners Group. Contracts on Bank of America fell 3 basis points to 120, pushing the gap to 30 basis points, the widest since July 7, CMA prices show.

“With no clarity, investors are definitely erring on the side of caution and betting that Merrill is spun from” Bank of America, Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek California, said in an e-mail.

“Merrill is most definitely not for sale,” Bank of America spokesman Scott Silvestri said by e-mail.

Pressure on High-Yield

Obama’s plan to tighten financial regulation brought out sellers of high-yield bonds, fixed-income research firm KDP Investment Advisors wrote in a research note today.

Clear Channel Communications Inc.’s 10.75 percent notes due in 2016 dropped 2.25 cents on the dollar to 72.75 cents to push their yield up to 18 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

NewPage Corp.’s 10 percent notes due in 2012 fell 2.5 cents on the dollar to 62 cents for a yield of 35 percent, Trace data show.

Clear Channel, the largest U.S. radio broadcaster, was taken private by Bain Capital LLC and Thomas H. Lee Partners LP. NewPage, the Miamisburg, Ohio-based producer of coated paper for magazines, is owned by Cerberus Capital Management LP.

The only debt issuer to default this week was Air Jamaica Ltd., by means of a distressed exchange, according to a report by Standard & Poor’s analysts led by Diane Vazza, head of global fixed-income research. The rating company forecasts a 6.9 percent default for the next 12 months.

European Contracts Rise

Contracts on the Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 1.25 basis points to 81.25 basis points, JPMorgan prices show.

The Markit iTraxx Financials index of credit-default swaps on 25 European banks and insurers rose 0.75 basis point to 84.5 basis points.

Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and is equal to $1,000 a year on a contract protecting $10 million of debt.

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net