TREASURIES-Drop in Asia after takeover of Fannie, Freddie

* Ten-year yield jumps as much as 19 bps

* Rise in equities curbs safe-haven bids for Treasuries

* GSE takeover plan fuels worry of more Treasuries issuance

By Masayuki Kitano

TOKYO, Sept 8 (Reuters) - U.S. Treasuries fell sharply in Asian trading on Monday after the U.S. government seized control of mortgage finance companies Fannie Mae FNM.N and Freddie Mac FRE.N, triggering a sharp rally in stocks and curbing safe haven bids for bonds.

The takeover could also mean more government borrowing and federal exposure to risky mortgage assets, which have been battered by the housing slump, analysts said.

The U.S. government on Sunday launched what could be its biggest bailout ever, in a bid to support the U.S. housing market and ward off more global financial market turbulence. [ID:nL8591243]

Treasuries were dragged lower due to the unwinding of flight-to-quality trades, said Yasutoshi Nagai, chief economist for Daiwa Securities SMBC.

The takeover plan makes it more explicit that debt issued by Fannie Mae and Freddie Mac will be backed by the U.S. government, and curbed worries about possible losses among financial institutions and investors that hold such paper, he said.

"This has the effect of delivering the message ... that a further widening of credit concerns will not be allowed," Nagai said, adding that spreads between agency debt and U.S. Treasuries were likely to narrow.

The benchmark 10-year Treasury notes fell 1-2/32 in price to yield 3.838 percent US10YT=RR, up 13 basis points from late U.S. trading on Friday.

At one point, the 10-year yield jumped as much as 19 basis points to 3.900 percent, the highest in about three weeks.

December 10-year note futures fell 1-21.5/32 from Friday's close to 114-30.5/32 TYv1.

Holders of Fannie Mae and Freddie Mac debt are generally expected to do well under the plan, although the companies' common and preferred shares are expected to take a beating and it is unknown whether equity holders will retain any value in the long term. [ID:nN07344487]

The Treasury is taking an equity stake in Fannie Mae and Freddie Mac, will purchase mortgage-backed securities they issue and will extend a credit line to them.

SUPPLY CONCERNS

The unwinding of a flight to quality, coupled with worries about the potential for increased issuance of Treasuries, are likely to push Treasury yields higher despite signs of weakness in the U.S. economy, said Yoshio Takahashi, fixed income strategist for Barclays Capital.

"The U.S. economy is in very poor condition as can be seen from the jobs data. But while this may not improve the situation, it is important from the standpoint of preventing conditions from worsening further," Takahashi said.

An unexpectedly steep 84,000 U.S. jobs were lost in August and the national unemployment rate hit a five-year high of 6.1 percent, data showed on Friday.

One point to watch is the eventual size of the U.S. government's purchases of mortgage-backed securities under the takeover plan, as that could have a bearing on the amount of Treasuries issuance that may be needed, he said.

"No upper limit has been set so that could lead to concerns about increased government debt issuance," Takahashi said.

The U.S. Treasury expects to purchase $5 billion of Fannie Mae and Freddie Mac mortgage-backed securities (MBS) within the next month, in what would be the first taxpayer cash outlays associated with the plan. [ID:nN07371928]

"Treasury is committed to investing in agency MBS with the size and timing subject to the discretion of the Treasury Secretary," the Treasury Department said in a fact sheet on Sunday. The Treasury's MBS purchasing programme is due to expire in December 2009. [ID:nN07368782] (Editing by Chris Gallagher)