(Recasts with central bank action)
By Natsuko Waki
LONDON, March 11 (Reuters) - World stocks and the dollar
rallied on Tuesday while safe-haven government bonds fell after
the world's central banks unveiled a plan to jointly inject
liquidity into financial markets.
The move gave a shot in the arm to malfunctioning world
credit markets, where trading in a broad range of securities
including euro zone government bonds and U.S. municipal bonds
had seized up over the past week.
Yield premiums on U.S. mortgage and agency debt fell
sharply after central banks in the United States, Britain, the
euro zone, Switzerland and Canada, announced the coordinated
liquidity move, the first since December.
The latest pressure on money markets has partly stemmed from
fears that hedge funds which are missing margin calls might be
forced to sell a broad range of debt instruments to raise
liquidity.
This has added to overall concerns that banks, some of which
are facing billions of dollars more in writedowns, might grow
even more reluctant to lend, crippling overall economic
activity.
"The Fed and global central banks have provided the thing
everyone needed and that's cash. The clear dislocations seen in
some bond markets of late have been related to the need for cash
by some financial intermediaries," said Martin Blum, head of
emerging markets research at Unicredit in Vienna.
"The actions ... deal with this issue by making it easier
for banks to get cash and that's important."
After the announcement, the FTSEurofirst 300 index <>
was up 2.2 percent from Monday, while MSCI main world equity
index <.MIWD00000PUS> extended gains to 0.9 percent. The index
earlier hit its weakest since mid-January.
Wall Street started trading sharply higher <.SPX>.
FIXED INCOME MOVES
Moves were also pronounced in fixed income markets.
Benchmark 10-year U.S. Treasury prices <US10YT=RR> were down
almost 100 ticks, for a yield of 3.5978 percent. The June Bund
future <FGBLM8> fell in tandem with other government bonds, down
70 ticks on the day.
U.S. swap spreads narrowed, indicating a lower cost of hedge
against U.S. interest rate swings. The spread on two-year
interest rate swaps over Treasuries narrowed to 92.75 basis
points, the tightest since late February.
In the latest round of liquidity measures, the Fed expanded
a securities lending programme and will accept a broader range
of securities, including U.S. agency debt and mortgage debt, as
collateral. Spreads on U.S. mortgage and agency debt tightened
sharply as a result.
Intra-euro zone government bond spreads -- which have been
widening due to diminishing liquidity for peripheral paper and
surging demand for safe German paper -- also narrowed by a few
basis points.
The Fed's foreign exchange swap lines with the European
Central Bank and the Swiss National Bank also increased,
ensuring better dollar liquidity.
The dollar rose nearly a full yen to 102.97 <JPY=> while the
euro slipped to $1.5377 <EUR=>, still up a quarter percent on
the day.
The euro earlier hit a record high at nearly $1.55 <EUR=>
after a survey showed German investor morale unexpectedly
improved in March.
The closely-watched ZEW survey showed its economic sentiment
indicator rose to a higher-than-expected -32.0 this month from
-39.5 in February.
The central banks' move comes as money markets flashed
warning lights again in recent sessions. The problems are also
emerging in the secured type of lending that required
collaterals, which had so far escaped the turmoil.
Demand for a 12-month Italian bill at an auction fell short
of the offered amount of 7.5 billion euros ($11.60 billion),
reflecting reluctance among investors to buy peripheral euro
zone government bonds. This is the first time this happened in
nine years.
Elsewhere, emerging sovereign spreads <11EMJ> tightened 15
basis points to 291 basis points while emerging stocks <.MSCIEF>
rose 1.7 percent.
The iTraxx Crossover index <ITCRS5EA=GFI>, which gauges the
cost of corporate bond insurance in Europe, tightened to 632
basis points, after hitting record levels last week.
U.S. light crude oil <CLc1> rose to a new all-time high
around $109.48 a barrel before trimming gains. Gold <XAU=> rose
1 percent to $984.00 an ounce before falling.
