Freddie, Fannie bailout sends markets up
US and Asian stocks surged nearly 5 per cent after Washington took over Fannie Mae and Freddie Mac to salvage the US housing market, spurring investors to buy back risky assets.business Updated: Sep 08, 2008 22:36 IST
US and Asian stocks surged nearly 5 per cent on Monday after Washington took over 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 devoured bank shares and ploughed into Asia-Pacific currencies other than yen after what could be the biggest US government bailout ever eased some fears in credit markets.
The US government had 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.
Still, the potential heavy borrowing the US government may need to fund the rescue package could ultimately hurt the 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.
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.