UPDATE 1-UK ABS derivatives tighten on U.S. bailout

(Updates prices, adds comment)

LONDON, Sept 8 (Reuters) - Derivatives on prime UK residential mortgage-backed securities (RMBS) tightened by more than 20 basis points on Monday, after the U.S. Treasury moved to bail out Fannie Mae and Freddie Mac, traders said.

But they added it was too early to assess the full implications for European securitised debt because of a continued lack of activity in underlying cash markets.

Credit default swaps (CDS) on prime UK RMBS, the most liquid part of the asset-backed market, traded down to around 147.5 basis points from 170 basis points on Friday, traders said.

The prices quoted are based on the bellwether triple-A-rated euro tranche of securities issued by HBOS Plc HBOS.L under its Permanent Master Trust programme.

Traders said the U.S. government's move to seize control of mortgage finance firms Freddie Mac and Fannie Mae was a potential positive for European asset-backed markets left largely comatose since last summer because it provided a backstop to protect the core U.S. mortgage market, which has become ensnared by a year-long housing credit crisis.

"It's another milestone to hopefully untangling some of the problems that have arisen," said a senior banker in European structured finance.

"Sentiment does feel better due to this bold stance taken by the U.S. government and it is indeed sentiment in the first instance which drove the European market to where it is today," one trader said.

"The Treasury is going to start buying new mortgage-backed securities debt from both companies... which will also have a beneficial impact upon ABS markets (U.S. especially) as this will put tightening pressure on spreads and as such put forced sellers on the back foot," he said.

He said the effect upon cash commercial mortgage-backed securities (CMBS) would only be seen once the cash prime RMBS market starts trading meaningfully, given the illiquidity of the asset class. But a second trader said the tightening on Monday, which coincided with massive gains in global bank shares, may prove to be "something of a false rally" that does not last.

"Investors and dealers are still mulling over changes in European Central Bank rules (for using ABS as collateral in repo transactions) as well as the implications of the bailout of Fannie and Freddie Mac," a third dealer said.

(See www.reutersrealestate.com for the global service for real estate professionals from Reuters).

(Reporting by William Kemble-Diaz and Jane Baird, editing by Will Waterman and Andy Bruce)