Oct. 19 (Bloomberg) -- Credit-default swaps rose the most in two months today as a U.S. Treasury-led effort to rescue structured investment vehicles didn't keep two funds from failing to repay maturing debt.

Funds run by London-based Cheyne Capital Management Ltd. and IKB Deutsche Industriebank AG defaulted on more than $7 billion of debt after they didn't sell new commercial paper to repay obligations. Former Federal Reserve Chairman Alan Greenspan said a fund initiated by Treasury Secretary Henry Paulson to help SIVs avoid a fire sale of $320 billion of assets may harm investor sentiment, Emerging Markets reported today.

``There's some skepticism among investors as to how this is going to work,'' said Willem Sels, head of credit strategy at Dresdner Kleinwort in London. ``That's weighing on credit markets this week.''

Investors are becoming more bearish as losses on SIVs, companies that borrow in short-term markets to buy longer-dated assets, add to concern that the fallout from record U.S. mortgage foreclosures may be worse than analysts had expected. The cost of credit-default swaps, contracts protecting payment on bonds, rises when the perception of credit quality worsens.

The CDX North America Investment Grade Series 9 Index soared 7.5 basis points to 61.75 basis points, according to Deutsche Bank AG in New York. The index rose 15.75 basis points this week, the biggest weekly increase in three months.

Countrywide Financial

Contracts on Countrywide Financial Corp., the largest U.S. mortgage lender, rose the most since Aug. 16, the day the company drew down an $11.5 billion credit line because access to traditional short-term financing vanished amid a credit crunch. The contracts climbed 75 basis points to 400 basis points, Phoenix prices show.

Credit-default swaps on Bear Stearns Cos., the securities firm that last month reported a 61 percent drop in profit because of losses in its fixed-income business, rose 16 basis points to 113 basis points, Phoenix prices show, a more than one-month high.

SIVs, which borrow in the commercial paper market to fund purchases of asset-backed securities, have been forced to sell about $75 billion of assets as investors retreated from all but the safest debt.

Receivers from Deloitte & Touche LLP are trying to organize a debt restructuring or asset sale for Cheyne Finance Plc, which was forced to liquidate some assets this year to repay maturing commercial paper, and has now stopped paying its debts altogether.

Missed Payments

Rhinebridge Plc, run by a unit of Dusseldorf-based IKB, missed payments on $65 million of commercial paper yesterday, Fitch Ratings and S&P said. The market value of the Rhinebridge assets are 63 percent of their $1.1 billion face value, S&P said.

Paulson, a former chief executive officer of Goldman Sachs Group Inc., brokered talks in Washington with Citigroup Inc., Bank of America Corp. and JPMorgan, the biggest U.S. banks, to set up a fund to buy SIV assets and avoid further forced sales. The banks announced the planned fund on Oct. 15.

``This super SIV idea has reminded people that this credit problem is deeper and more fundamental than they had thought, and it isn't going away anytime soon,'' said Bob Janjuah, the global credit strategist at Royal Bank of Scotland Group Plc in London.

Greenspan said it isn't clear that the benefits to be gained from such a fund exceed the risks, according to a story on the Web site of Emerging Markets, a newspaper published during meetings of the International Monetary Fund, the World Bank and regional development banks.

Capital One

Credit-default swaps tied to Capital One Financial Corp., the biggest independent U.S. credit-card issuer, rose a day after the company posted its first quarterly loss since 1994 because of costs from shutting a mortgage unit that lent to Alt-A borrowers with credit histories exceeding subprime standards. The contracts rose 33 basis points to 145 basis points, Phoenix Partners prices show.

Contracts on New York-based Merrill Lynch & Co. soared 32 basis points to 100 basis points, Phoenix prices show. Merrill Lynch, the third-largest securities firm, said Oct. 5 that it will report its first quarterly loss since 2001 after writing down $5 billion on mortgages, asset-backed securities and loans.

``There was a lot of money to be made buying credit in August and September,'' said Jeffrey Cucunato, managing director at BlackRock Inc. in New York, which manages about $510 billion in fixed-income assets. ``With the market back in full froth mode prior to this week, spreads got back to fair value -- they were no longer cheap. We used the strength to pare down risk.''

Bank of America

Bank of America, the second-largest U.S. bank, said yesterday that profit fell 32 percent in the third quarter because of about $4 billion in trading losses, defaults and writedowns.

The International Monetary Fund this week cut its forecast for 2008 U.S. economic growth to 1.9 percent from 2.8 percent.

``The news flow turned out to be even more negative this week, with earnings jitters, macro concerns and accelerating fears that the Super SIV fund will be a flop, putting pressure on credits,'' Jochen Felsenheimer, head of credit derivatives strategy at UniCredit SpA in Munich, wrote in a note to clients today.

The gap between the yield on asset-backed commercial paper and the Fed funds rate fell today.

Issuers of one-day asset-backed commercial paper are paying about 5.05 percent, or 30 basis points more than the Fed's funds rate, compared with a one-year average of about 21 basis point more, Bloomberg data show.

Overnight Yields

Overnight asset-backed commercial paper yields widened to as much as 93 basis points more than the Fed's target rate for overnight loans between banks on Aug. 31, according to data compiled by Bloomberg.

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 company fail to adhere to its debt agreements.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

The LCDX Series 9 index, a gauge of confidence in the U.S. leveraged loan market that falls as investor sentiment declines, dropped 0.8 point to 98.5, according to Goldman Sachs Group Inc. The index earlier fell to 98.35, the lowest since it was created Oct. 3.

Contracts on PMI Group Inc., the mortgage insurer that said yesterday it will have a third-quarter loss as the cost to bail out lenders rises, rose 37 basis points to 234 basis points, prices from CMA Datavision in London show.

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ; Bryan Keogh in New York at bkeogh4@bloomberg.net