China's junk bond yield premium is climbing at its fastest pace this year on concern an extended slump in the world's second-biggest economy will cause a default.

The extra yield investors demand to hold five-year notes rated AA over similar-maturity sovereign debt had widened 15 basis points this month to 245 by Friday, poised for the biggest monthly increase of 2012, according to Chinabond data. US speculative-grade bonds yield 632 basis points more than Treasuries, Bank of America Merrill Lynch data show.[Company Incorporation USA]

Chinese banks' bad debts rose in each of the last three quarters, the longest run of increases in eight years, and the nation's first bond default was averted in April when Shandong Helon Co paid off 400 million yuan ($63 million) of notes at a time when it had 957 million yuan in overdue loans. Premier Wen Jiabao said last week downward pressure on the economy remained "relatively large" and money-market rates are climbing as the central bank refrains from cutting lenders' reserve requirements.