UPDATE 1-Fannie Mae, Freddie Mac credit spreads tighten

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NEW YORK, April 1 (Reuters) - The cost of protecting debt of Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) with credit default swaps tumbled on Tuesday after strong demand for a share offering by Lehman Brothers (LEH.N: Quote, Profile, Research) lifted sentiment in the financial sector.

Five-year credit protection costs on Fannie Mae fell by 9 basis points to about 43.5 basis points, or $43,500 a year to protect $10 million of debt, while Freddie Mac's protection costs fell by about 8.5 basis points to about 43.5 basis points. For details see [ID:nN01215030].

"I think financials are doing well overall," said Mirko Mikelic, portfolio manager for Fifth Third Asset Management in Grand Rapids, Michigan.

The Federal Reserve's recent decision to make financing available to investment banks through its discount window was a "huge" move, Mikelic said. "That's probably helping out funding and that will probably help out the market in the long term."

Lehman Brothers' successful sale of $4 billion of convertible preferred shares also shows "there's still demand and people will still participate in financial names," he said. (Reporting by Dena Aubin; Editing by James Dalgleish)