Fannie-Freddie bailout whets hunger for risk

Asian stocks surged four per cent yesterday after Washington bailed out Fannie Mae and Freddie Mac to salvage the US housing market, spurring investors to buy back risky assets and sell safe havens such as government bonds.

Fund managers, who have been keeping their portfolios heavy with cash, devoured bank shares and ploughed into Asia-Pacific currencies other than the yen after what could be the biggest ever US government bailout eased some fears in credit markets.

Still, the potential heavy borrowing the US government may need to fund the rescue package could ultimately hurt the US dollar, some analysts said, a prospect that also sent Treasury bond yields higher.

"You do take some of the default risk out of the market, so in that sense this is good for other financial assets. You have reduced systemic default risk," said Paul Schulte, regional strategist with Lehman Brothers in Hong Kong.

"Longer-term we have a lot more glass to crawl over because we have arrangements with other financial institutions that need to get worked out," he said.

Government bond prices have become increasingly more expensive relative to equities in Asia because investors have been reluctant to buy into local markets with inflation and a global slowdown combining to darken the outlook.

Dealers in the currency market scrambled to sell the yen for just about every major currency after last week knocking down the euro to the lowest in a year against the yen because of 4fears the global economy was slowing rapidly. The US government on Sunday seized control of mortgage finance companies Fannie Mae and Freddie Mac which own or guarantee half of all US mortgages, ending weeks of speculation after regulators judged the companies' shrinking capital position left them too vulnerable. As part of the plan, the Treasury is taking an equity stake in the companies and promised to purchase mortgage-backed securities they issue and provide; however, much liquidity is necessary to keep them afloat, actions that together could top €139 billion.

Asian local currency debt yields narrowed relative to their benchmarks and credit default swap spreads, a measure of the cost of insuring against default, also tightened as investors re-priced the level of risk in markets.

US Treasuries fell sharply in reaction to the Fannie and Freddie bailout.