* Stocks up, govt bonds down on US rescue of mortgage
giants
* Yen suffers as risks reduced by prop to US housing market
* Global financial crisis still wears on, analysts say
(Updates prices, adds quote, comment on valuation)
By Kevin Plumberg
HONG KONG, Sept 8 (Reuters) - Asian stocks surged 4 percent
on Monday after Washington bailed out 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.
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 3.3 percent,
bouncing from a 5-1/2-month low on Friday.
Stocks of large banks such as Mitsubishi UFJ Financial
Group <8306.T> and Mizuho Financial Group <8411.T> rallied 12.3
percent and 11.1 percent, respectively. []
The MSCI index of Asia-Pacific stocks traded outside of
Japan <.MIAPJ0000PUS> was up 4.4 percent, 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 3.8 percent, led
by shares of Europe's largest lender HSBC Holdings <0005.HK>.
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.
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 156.87 yen <EURJPY=R>, up 2 percent from
Friday and bouncing sharply above a 13-month low hit last week
of 150.60. The dollar climbed 1 percent to 108.80 yen <JPY=>.
The U.S. currency fell 1.4 percent against the Singapore
dollar <SGD=> and 1.6 percent against the Malaysian ringgit
<MYR=>.
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 <CLc1> was at $108.93 a
barrel.
The U.S. government on Sunday seized control of mortgage
finance companies Fannie Mae <FNM.N> and Freddie Mac <FRE.N>,
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 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
repriced the level of risk in markets.
The iTRAXX Asia ex-Japan high-yield index <ITAHY5Y=IE>, 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 3.83 percent <US10YT=RR>, up from 3.71
percent in late U.S. trading on Friday.
