Emerging debt-Asian bond spreads narrow on US mortgage rescue

HONG KONG, July 14 (Reuters) - Asian bond spreads tightened significantly on Monday after the United States proposed rescue measures for beleaguered U.S. mortgage lenders Fannie Mae and Freddie Mac, but caution remained about the fragility of debt markets.

Traders said lingering doubts about the capital-raising abilities of both firms, which are central to the functioning of the U.S. housing market, as well as continued concern about the U.S. financial sector would keep any rally in check.

Even so, a key measure of risk aversion in the region, the iTRAXX Asia ex-Japan high-yield index ITAHY5UA=ICAP, tightened by 15 basis points (bps) to 535/545.

That was below the 580 hit in early July and well under the record above 650 hit before the rescue of Bear Stearns in March, when investors had similarly fretted about threats to the global financial system.

"I don't think this Fannie Mae/Freddie Mac issue is going to get resolved with any simple solution. The reality check will come back later again," said Dilip Shahani, a credit analyst at HSBC in Hong Kong.

The U.S. Federal Reserve sought to calm markets by offering Fannie (FNM.N: Quote, Profile, Research) and Freddie (FRE.N: Quote, Profile, Research) access to emergency cash. The U.S. Treasury offered to boost its line of credit to the two U.S. mortgage firms and said it would buy equity in them if needed. [ID:nN13387357]

One trader said investors were waiting for the reaction to these weekend developments from European and U.S. markets.

"It's hard to conclude that these steps will completely resolve the situation. In the medium term, sentiment is still very fragile," said the Hong Kong-based trader.

"We are seeing some technical short-covering, but investors are not going to want to be too exposed, so they will be reluctant to sell too much protection," he added.