THE CRISIS surrounding Fannie Mae and Freddie Mac eased yesterday as both the equity and the debt of the two US mortgage financiers rallied - although worries remained that a government bail-out would be necessary.

The more encouraging market movements came on the back of greater confidence that the agencies would be able to continue enjoying access to funding in the debt markets, which could stave off government intervention.

As debt issued by Fannie and Freddie rallied for a third consecutive session, stocks of the two groups began to show signs of stability after a week of losses.

Fannie shares were up 6.76 per cent by midday trade, and Freddie gained 3.38 per cent, after both lost more than 40 per cent of their market value this week on speculation that a government rescue for the companies would leave shareholders with nothing.

Nevertheless, expectations that the US treasury would have to use the powers it was granted by Congress last month to rescue the two companies by extending credit or investing in their equity remained rampant.

Aides on Capitol Hill said treasury officials had been consulting senior members of Congress in recent days, including Richard Shelby, the top Republican on the Senate banking committee, and Barney Frank, chairman of the House financial services committee, to keep them briefed on developments.

As recently as last Monday, the treasury publicly insisted it had no plans to use its new powers to invest in Fannie and Freddie, but by Wednesday it was shying away from that assurance