Morgan Stanley's CDS spreads narrow after news

NEW YORK (Reuters) - The cost of protecting Morgan Stanley's debt with credit default swaps tumbled on Monday after Japan's largest bank said it planned to take a stake of up to one-fifth in the firm.

Morgan Stanley's five-year credit default swaps fell to 375 basis points, or $375,000 a year to protect $10 million of debt, according to data from Phoenix Partners Group. Morgan Stanley's swaps had closed around 550 basis points on Friday.

Mitsubishi UFJ Financial Group said on Monday it would buy 10 to 20 percent of Morgan Stanley's common stock as part of a strategic alliance.

Morgan Stanley's swaps had already narrowed about 50 basis points earlier in the day after news that it had agreed to become a bank holding company and would receive an additional safety net from the Federal Reserve.

Morgan Stanley's move to become a bank holding company will increase stability and reduce funding costs, although it will also increase capital requirements and subject the company to more oversight, Barclays Capital said in a research note.

(Reporting by Dena Aubin; Editing by James Dalgleish)