* Treasury yields rise after Fed to take 80 pct stake in
AIG
* Crude up $3, yen drops as some risky assets bought back
* Investors still cautious about unstable financial sector
(Repeats to additional subscribers with no change to text)
(Updates prices, detail)
By Kevin Plumberg
HONG KONG, Sept 17 (Reuters) - Asian stocks rose and oil
was up $3 a barrel on Wednesday after the Federal Reserve said
it would bail out American International Group in a dramatic
about-face as victims of the financial crisis kept piling up.
After reports about the plan surfaced, investors bought
back equities while selling the government bonds and yen they
had accumulated in the wake of Lehman Brothers' <LEH.P> filing
for bankruptcy protection on Monday. However, the stock market
rally across the region was still rather tame amid lingering
fears about the banking sector.
Indications of fear in markets were elevated and evidence
showed hoarding of U.S. dollars among banks, reflecting
distrust rather than confidence.
The Fed will 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, defusing the immediate
risk of a financial system meltdown but burdening the U.S.
taxpayer more following the government takeover of Fannie Mae
and Freddie Mac about a week ago. []
The move 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 flexible.
"I expect the markets will be a bit better today but that's
after a very rough period," said Peter Hilton, head of Asia
equity research with Royal Bank of Scotland in Hong Kong.
"People were a bit worried about their effective savings. So
relieving that pressure helps some," he said.
Japan's Nikkei share average <> rose 2.1 percent after
closing at a three-year low on Tuesday. Shares of Japan's top
bank Mitsubishi UFJ Financial Group <8306.T> was lagging the
broad market, up 1.5 percent.
The MSCI Asia-Pacific ex-Japan stocks index <.MIAPJ0000PUS>
pared early gains and was up 1 percent at 0315 GMT, after
hitting a two-year low on Tuesday. It is down 36 percent so far
this year.
Hong Kong's Hang Seng index <> slipped 0.8 percent
after an early rally fizzled because of persistent weakness in
major bank stocks. Shares of HSBC <0005.HK>, Europe's biggest
lender, was the biggest drag on the index, followed by China
Construction Bank <0939.HK>, China's second-largest bank.
The rescue of AIG is the latest event in what has already
been 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.
RELIEF BUT 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, go to
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."
The U.S. dollar rose 0.9 percent against the yen to 106.26
yen <JPY=> after sinking to a four-month low of 103.54 yen on
Tuesday. The euro <EUR=> was up 0.5 percent at $1.4186, boosted
mainly by the 15-nation currency's 1.5 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 last night to
keep interest rates on hold, spurning market expectations for a
cut.
Two-year U.S. Treasury notes <US2YT=RR> fell 12/32 in
price, driving yields up to 1.99 percent, from 1.79 percent
late in New York on Tuesday. Yields on 10-year notes
<US10YT=RR> rose to 3.56 percent, from 3.44 percent.
The December 10-year Japanese government bond future
dropped a full point to 138.39 <2JGBv1> after at one point on
Tuesday hitting the upper trading limit, up 3 points.
Commodity prices rallied, lead by oil. The November U.S.
light crude future was up $3.34 to $94.49 a barrel <CLc1> after
hitting a seven-month low on Tuesday, supported partly by
supply disruptions after Hurricane Ike crashed into the Gulf of
Mexico.
But 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 of the year, 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 Lincoln Feast)
