By Jeremy Gaunt, European Investment Correspondent
LONDON, July 14 (Reuters) - A U.S. rescue plan for troubled
mortgage agencies Fannie Mae and Freddie Mac propelled European
shares sharply higher on Monday and lifted the dollar off
near-record lows against the euro.
Government bonds were weaker on the growing risk appetite
but Asian shares failed to benefit from improved sentiment.
The U.S. Treasury and Federal Reserve called on Sunday for
sweeping measures to lend money and buy equity if necessary in
Freddie Mac <FNM.N> and Fannie Mae <FRE.N>, government-sponsored
enterprises (GSE) owned by shareholders.
The plan is an attempt to calm investors after stocks of
both plummeted more than 40 percent last week on fears the
companies, the cornerstones of the U.S. housing market, were
under-capitalised.
Fannie and Freddie own or guarantee $5 trillion of debt,
close to half the value of all U.S. mortgages. Foreign central
banks, mostly in Asia, hold $979 billion of the bonds and
mortgage-backed bonds sold by the agencies.
"The ramifications of all this seem to suggest that the
U.S. realised they cannot tolerate further pressure on the U.S.
housing sector," said Nomura rate strategist Charles Diebel.
Five-year debt spreads between Fannie/Freddie and U.S.
Treasuries were holding at about 80 basis points after shrinking
almost 30 basis points on Friday in the biggest one day move
ever.
Typically, Fannie/Freddie debt would trade fewer than 10
basis points over Treasuries. Some investors have said the
likely government bail out make the GSEs' debt attractive.
The Frankfurt-listed shares of Fannie <FNM.F> and Freddie
<FRE.F> were up almost 18 percent.
EUROPEAN SHARES BOUNCE
The U.S. plan triggered a relief rally in Europe, with the
pan-European FTSEurofirst 300 <> climbing more than 1.3
percent.
"The U.S. authorities are doing everything they can to prop
up the financial system ... It's good news in an unremitting
cycle of gloom," said Peter Dixon, economist at Commerzbank in
London.
Sentiment was also boosted by British bank Alliance &
Leicester <ALLL.L>, which said it was at an advanced stage of
discussions about a takeover offer. A&L shares soared 45
percent.
Earlier, Japan's Nikkei stock average abandoned early gains
to close down 0.2 percent.
Banks initially rose sharply after the U.S. Treasury/Fed
plan was unveiled, but investors locked in profits later before
stepping to the sidelines to wait for U.S. trade.
The benchmark Nikkei <> finished at 13,010.16, having
lost 29.53 points, its lowest since April 15. The broader Topix
<> was down 0.4 percent at 1,280.72.
DOLLAR BOUNCES
The dollar bounced off a near-record low against the euro.
"(The U.S. plan) is something that improves sentiment
generally in the market, with risk appetite and so on, and it
will also be positive for the dollar," said Johan Javeus, FX
strategist at SEB Merchant Banking in Stockholm.
"But we are still in a trend which is quite dollar negative
so it may be a temporary relief."
The euro was down 0.6 percent on the day at $1.5845, having
earlier come within half a cent of April's record highs of
$1.6018 <EUR=>.
The dollar index <.DXY>, which tracks its progress against a
basket of six major currencies, added 0.7 percent to 72.281,
bouncing off a 2-1/2 month low set before the U.S. announcement.
The greenback was also up 0.5 percent at 106.76 yen <JPY=>.
Euro zone government bonds were generally weaker. Two-year
bond yields <EU2YT=RR> were 2 basis points higher, while 10-year
yield bond yields <EU10YT=RR> were just less than 1 basis point
lower at 4.465 percent.
(Additional reporting by Kirsten Donovan and Rebekah Curtis,
editing by Mike Peacock)
