The story cites "people familiar with the matter" and said "precise details of Treasury's plan couldn't be learned" but said it will include changes to senior management at both firms.

"The perception is they're going to come with some kind of backstop," said Sean Murphy, a bond trader at RBC Capital Markets in New York.

Murphy dismissed speculation that Friday's rebound in stocks and selloff in Treasuries may have been fed by advance knowledge of the report.

"We saw a lot of real money selling [in Treasuries] at the highs. There was heavy volume and a lot of profits were taken," he said.

The report came minutes after the Friday equity market close. In after-hours trading, shares of companies initially rallied but Fannie later fell 16.9% and Freddie 7% on worries the plan could wipe out shareholders.

The report comes after meetings were planned between Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, the chief executives of Fannie Mae and Freddie Mac and the companies' new regulator, the Federal Housing Finance Agency.

In July, U.S. lawmakers granted the Treasury the powers to lend money to Fannie and Freddie or take an equity stake. Officials then hired investment bank Morgan Stanley to conduct a review of the government-sponsored enterprises.

The two companies own or guarantee about half of the $12 trillion U.S. mortgage industry. Continuing declines in the housing market and worries about their ability to raise capital have caused Fannie and Freddie shares to decline 88% and 92% respectively in the past year.

Combined, Fannie and Freddie will need to refinance more than $225 billion in maturing securities by the end of the month.

A day before the report, bond guru Bill Gross announced he was no longer buying agency debt and said it was time for the Treasury to take action. At PIMCO, Gross manages the world's largest bond fund.

"To the extent that it does happen, it's a needed step," Gross told CNBC after the report.

Gross declined to comment on whether he had been approached by the government on a Fannie and Freddie plan. He said it would be mandatory for the Treasury to have some equity participation in the deal.

The Wall Street Journal story quoted Treasury spokesperson Jennifer Zuccarelli who said, "We are making progress on our work." She declined further comment.

Officials from Fannie and Freddie told Reuters they have no comment on the report.

The fixed income and foreign exchange markets were still open when the report was released. Treasuries sold off on fears the plan will force the U.S. to issue more debt. Two-year yields rose to 2.30% from 2.23%. Ten-year yields rose to 3.70% from 3.66%. The U.S. dollar rose to 107.73 from 107.24 against the yen and the euro rose to 1.4267 from 1.4234 USD.

Murphy doesn't believe the plan will involve the U.S. government taking on agency debt and said the market moves may have been exaggerated by low volume. He said the eventual Treasury market reaction will depend on the details of the bailout.

"If they do take on debt, the [Treasury] curve will flatten like a pancake," Murphy said.

By Adam Button, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it

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