TREASURIES-Fall on US steps to help Fannie, Freddie

By Masayuki Kitano

TOKYO, July 14 (Reuters) - U.S. Treasuries fell on Monday after the U.S. Treasury and Federal Reserve unveiled sweeping steps to restore investor confidence in U.S. mortgage lenders Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

The Treasury increased its direct credit lines to the mortgage giants that fund half of all U.S. mortgages and said it would buy their shares if necessary, while the Fed said its direct lending window to financial firms was available to them. [ID:nN13387357]

The announcement triggered a fall in Treasuries, a 1 percent surge in U.S. stock index futures SPc1, a rise in the dollar and a tightening in swap spreads.

The measures fuelled hopes for some alleviation of the U.S. housing-sector and mortgage-related woes that are at the root of the credit market turmoil, said a portfolio manager for a Japanese insurer.

"If the government's involvement grows stronger, it could become easier to buy mortgages or to conduct securitisation," the portfolio manager said, adding that Treasury yields could head higher for a while.

A key point will be how the U.S. market reacts to the aid extended to the government-sponsored enterprises (GSEs), he added.

Ten-year Treasury note futures fell 16/32 in price to 113-29.5/32 TYv1.

The benchmark 10-year Treasury note fell 10/32 in price to yield 4.012 percent US10YT=RR, up about 4 basis points from late U.S. trading on Friday.

The two-year note fell 3/32 in price to yield 2.673 percent US2YT=RR, rising about 6 basis points from late New York.

Swap spreads narrowed slightly, with the two-year swap spread standing at around 85.75 basis points, down around 2 basis points from late New York on Friday. SMKR99

Although Treasuries could come under pressure for a while, concerns that the U.S. economy may not show much improvement this year are likely to support them to some extent, the portfolio manager said.

"It could be hard to tilt positions in either direction," he said, adding that investors would also watch U.S. banks' earnings announcements over the next couple of weeks. [RESF/US]

On Friday, the 10-year Treasury note slid 1-11/32 in price and its yield rose around 17 basis points for its biggest one-day move since March 18, when the Fed cut its benchmark federal funds rate by 75 basis points.

Treasuries had slid after the New York Times said on Friday that U.S. administration officials were considering a plan to have the government take over one or both of the GSEs.

The talk of a bailout raised fears that the supply of safe-haven Treasuries would increase, while agency debt rallied on Friday due to expectations that yield spreads between agency debt and Treasuries would narrow. (Editing by Hugh Lawson)