* Treasury yields up as U.S. gives $85 bln rescue line to
AIG
* Crude up $3, yen drops as some risky assets bought back
* Investors still wary about unstable financial sector
(Recasts, updates prices, adds European outlook)
By Kevin Plumberg
HONG KONG, Sept 17 (Reuters) - Asian stocks rose and oil
jumped more than $3 on Wednesday after the U.S. government
bailed out cash-strapped American International Group in a
dramatic about-face to stem further damage to the global
financial system.
But gains were cautious in many markets amid fears that the
global credit crisis, now in its second year, could claim more
victims and choke economic growth.
Major European stock markets were expected to open up as
much as 2.1 percent in a relief rally after a heavy battering
in recent sessions.
Investors selectively bought back equities while selling
some of the low-risk government bonds and yen they had
accumulated in the wake of Lehman Brothers' <LEH.P> bankruptcy
filing on Monday.
However, indications of fear in financial markets remained
elevated, the cost of insurance against defaults was soaring
and evidence showed banks were hoarding U.S. dollars,
reflecting distrust rather than confidence.
The U.S. Federal Reserve agreed to provide AIG <AIG.N>,
once the largest insurer in the world, a bridge loan of $85
billion and take an 80 percent stake in the ailing company to
stave off a bankrupcty that would have thrown global financial
markets into deeper turmoil. []
But the move added to the burden on U.S. taxpayers
following the government takeover of mortgage firms Fannie Mae
and Freddie Mac about a week ago. []
The rescue was a surprise to some since the U.S. government
had allowed Lehman to fail only days ago, suggesting how
unstable markets have forced consumers, investors and
policymakers alike to be more flexible.
"Rescuing AIG itself is a good thing, but we're seeing a
double-standard here. Why is the Fed helping AIG but not
Lehman? Unless U.S. authorities come up with a clear standard
on who to help and who not to, market unrest will continue,"
said Koichi Haji, chief economist with NLI Research Institute
in Tokyo.
Japan's Nikkei share average <> rose 1.2 percent but
was well off the day's highs, after closing at a three-year low
on Tuesday. Shares of Japan's top bank Mitsubishi UFJ Financial
Group <8306.T> finished up 1 percent.
The MSCI Asia-Pacific ex-Japan stocks index <.MIAPJ0000PUS>
pared early gains and was up 0.8 percent at 0600 GMT, after
hitting a two-year low on Tuesday. It is down 37 percent so far
this year.
Hong Kong's Hang Seng index <> fell 1.85 percent as
investors remained wary of bank stocks. Shares of China
Construction Bank <0939.HK>, China's second-largest bank, was
the biggest drag on the index, slumping 8 percent, followed by
HSBC <0005.HK>, Europe's largest lender.
The rescue of AIG was the latest event in one of the most
tumultuous weeks in the history of finance that has changed the
face of the U.S. banking sector. Merrill Lynch <MER.N> agreed
on Monday to be bought by Bank of America <BAC.N> for $50
billion.
FEAR REMAINS
Investors knocked the MSCI All-Country World equities index
<.MIWD00000PUS> to the lowest since December 2005 on Tuesday as
a flight from anything resembling risk in markets reached a
fever pitch. The driving fear was a bankruptcy by AIG would
trigger a catastrophic chain reaction of defaults in the global
credit market.
AIG shares have plunged 94 percent year-to-date. For a
graphic, see:
https://customers.reuters.com/d/graphics/AIG_160908.gif
"If AIG had gone belly up, you would have an unknown,
humongous number of default swaps cut off. What would that lead
to? We were already approaching some market disruption," said
Dan Fuss, vice chairman of Loomis Sayles in Boston. "This is a
huge relief to many parts of the financial markets."
Buoyed by the AIG rescue news, the U.S. dollar rose 0.8
percent against the yen to 106.11 yen <JPY=> after sinking to a
four-month low of 103.54 yen on Tuesday.
The euro <EUR=> was up 0.5 percent at $1.4190, boosted
mainly by the 15-nation currency's 1.3 percent recovery against
the yen to 150.77 yen <EURJPY=>.
Investors unloaded government bonds after the AIG rescue
and in the wake of the Federal Reserve's decision overnight to
keep interest rates on hold, spurning market expectations for a
cut.
Two-year U.S. Treasury notes <US2YT=RR> fell 8/32 in price,
driving yields up to 1.92 percent, from 1.79 percent late in
New York on Tuesday. Yields on 10-year notes <US10YT=RR> rose
to 3.53 percent, from 3.44 percent.
Commodity prices rallied, led by oil. November U.S. light
crude futures <CLc1> rose $3.34 to $94.49 a barrel after
hitting a seven-month low on Tuesday, supported partly by
supply disruptions after Hurricane Ike crashed into the Gulf of
Mexico.
The last-minute government rescue of AIG appeared to have
neither ended the financial crisis, nor completely revived
investors' willingness to take risks. []
The so-called TED spread of 3-month U.S. dollar borrowing
rates used by large banks over the 3-month U.S. Treasury bill
yield has risen a full percentage point in the last week to the
widest since the credit crisis began more than a year ago, as
money markets effectively froze overnight.
The spread is often viewed as an indication of how much of
a premium market participants are demanding to take risks.
"People are scared of further financial institution
difficulty. Funding remains difficult and flows of
risk-sensitive capital have slowed considerably," said Patrick
Bennett, Asia foreign exchange and interest rates strategist
with Societe Generale in Hong Kong.
(Editing by Kim Coghill)
(To read more stories on Lehman and the turmoil in global
financial markets, click on []. For the state of
play of Asian stock markets please click on: <>))
