Fannie, Freddie bailout spurs hunger for risk

Asian stocks surged 4% on Monday after Washington took over Fannie Mae and Freddie Mac to salvage the U.S. housing market, spurring investors to buy back risky assets and sell safe havens such as government bonds.
European stock markets were expected to open sharply higher, with financial bookmakers expecting Britain's FTSE 100 up 3.4%, Germany's DAX up 2.9% and France's CAC up 4.3%.
Fund managers, who have been keeping their portfolios heavy with cash, devoured bank shares and ploughed into Asia-Pacific currencies other than yen after what could be the biggest U.S. government bailout ever eased some fears in credit markets.
Still, the potential heavy borrowing the U.S. government may need to fund the rescue package could ultimately hurt the U.S. dollar, some analysts said, a prospect that also sent Treasury bond yields higher.
"You do take some of 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.
Japan's Nikkei share average rose 3.4%, bouncing from a 5-1/2-month low on Friday.
Stocks of large banks such as Mitsubishi UFJ Financial Group and Mizuho Financial Group rallied 13.3% and 12.1%, respectively.
The MSCI index of Asia-Pacific stocks traded outside of Japan was up 4.8%, rebounding from the lowest since October 2006. It was on track for the biggest daily gain since January 2008.
Hong Kong's Hang Seng index was up 3.9%, led by shares of Europe's largest lender HSBC Holdings.
Government bond prices have become increasingly more expensive relative to Asian equities because investors have been reluctant to buy into local markets with inflation and a global slowdown combining to darken the outlook.
For example, the earnings yield on the S&P Asia 50 index minus the yield on the 10-year U.S. Treasury note — a gauge of Asian stocks' value relative to risk-free bonds — is at the highest since October 2005.
RECOVERY IN RISK
Dealers in the currency market scrambled to sell 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 fears the global economy was slowing rapidly.
The euro jumped to 156.30 yen up 1.7% from Friday and bouncing sharply above a 13-month low hit last week of 150.60. The dollar climbed 0.9% to 108.65 yen
The U.S. currency fell 1.2% against the Singapore dollar and 1.6% against the Malaysian ringgit
Oil prices rose more than $2 a barrel, supported by worries Hurricane Ike would tear through the Gulf of Mexico and further crimp rig activity in what has been a busy storm season. U.S. light crude for October delivery was at $108.35 a barrel.
The U.S. government on Sunday seized control of mortgage finance companies Fannie Mae and Freddie Mac, which own or guarantee half of all U.S. 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 $200 bln.
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 repriced the level of risk in markets.
The iTRAXX Asia ex-Japan high-yield index a regional gauge of risk aversion, fell by 35 basis points to around 535-540, according to a trader, roughly where it was a month ago.
"Rates have dropped a lot in the last couple of weeks on concern about the growth outlook for the region as a whole, so I think this is a retracement of what happened in the last few weeks," said Irene Cheung, head of Asia local markets research with ABN AMRO in Singapore.
Citigroup analysts said the longer Washington increases its debt by figuring a way out essentially to restructure the housing market, the more the dollar and U.S. assets in general are seen in a negative light.
"This stops well short of the 'nightmare scenario' where foreign investors start to sell the stock of their U.S. holdings, triggering a U.S. dollar collapse, but represents another factor arguing against more dollar-favorable capital flows," the analysts said in a note.
U.S. Treasuries fell sharply in reaction to the Fannie and Freddie bailout. Benchmark 10-year Treasury prices fell, pushing up yields to 3.84% up from 3.71% in late U.S. trading on Friday.