The Merrill Lynch executives who took the decision to sell off a bunch of complex mortgage-related debt assets at about 22 cents in the dollar during the summer could have good reason to feel peeved once the US market bail-out plan is finalised.

The Treasury and Federal Reserve insist that they will not risk taxpayer losses by overvaluing similar bonds to be bought up in the $700bn Troubled Asset Relief Program. But by the same token, the banking system cannot afford to sell such debt at firesale prices.

Asset-backed bond markets remain finely poised as investors await the outcome of the machinations of Congress and political horse trading ahead of a deal. US and European mortgage-backed bonds and related derivatives rallied strongly when the news first came.

Partly this was down to markets clawing back ground from the sell-off that had occurred in the days ahead of last Friday's announcement, driven by the big rise in systemic risk fears. Since then performance has been mixed.

Derivatives of European mortgage-backed bonds have seen spreads, or risk premiums, drift wider every day since Monday's rally, according to analysts. In the US, the ABX indices of derivatives of triple A rated subprime bonds have seen prices turn down slightly as the week has gone on, according to data from Markit.

However, US cash markets for non-agency mortgage bonds have held steady and trading has been thin as potential buyers wait for a deal to take shape.

The overwhelming sentiment is that a deal will get done, but there is still huge uncertainty about what form it will take and, crucially, what will be included and how assets will be priced.

"Anyone who believes that Tarp will not be approved is smoking a substance that's illegal in most countries," says Jim Irvine, head of securitised products at Henderson Investors in London. "It will be approved along with the creation of a new 'Tarp Governance Body' to ensure that 'fair value' is also fair to the taxpayer. Any other outcome is unimaginable."

Uncertainty about where the bias will settle between paying enough for assets to help bank solvency and being hard enough to really protect taxpayers is making it tough for markets to find a level.

Much of the debate has also been about what kinds of assets will qualify. The initial plan suggested only mortgage assets, but that was quickly changed to allow greater flexibility.

Analysts at Morgan Stanley this week said that the latest draft suggested that "everything is fair game".

Darrell Wheeler at Citigroup in New York says that credit derivatives on collateralised debt obligations containing subprime mortgage bonds were the key issue for the insurer AIG and that most of Lehman's troubled commercial real estate positions actually involved floating-rate whole loans and bridge equity positions. The Tarp then might end up focusing more on these types of exposures than on plain residential mortgage backed securities or commercial mortgage backed securities.

"We expect that most standard RMBS or CMBS positions held by institutions have already been near properly valued with the firms raising sufficient capital," Mr Wheeler says. "The plan is really needed to provide liquidity for 'oddball' assets or lower credit assets where price discovery has been difficult."

In Europe, the rally is on less firm ground because any Tarp will not be open to non-dollar assets, even if it is extended to non-US banks and institutions. However, analysts at Deutsche Bank say European banks would still benefit.

"Specifically, with regard to European structured finance, aside from the positive spillover effect from US ABS trading up, we also expect an improvement in market technicals as European-domiciled holders of US securitised risk assets offload illiquid bonds into the [Tarp], either directly or via an intermediary with access to the programme," says Ganesh Rajendra, head of European securitisation research.

Mr Rajendra, like many others, does not believe eurozone or UK governments are close to heeding Treasury secretary Hank Paulson's call for them to follow the US lead. One obstacle for the UK specifically, he estimates, is that such a programme would cost far more as a proportion of national income.

However, banks along with industry bodies such as the UK Council of Mortgage Lenders and the Securities Industry and Financial Markets Association are demanding action to stimulate mortgage markets, although they have yet to call explicitly for a Tarp-type solution. "In the UK, we have been of the opinion that it is essential that the government steps in and provides some cash to purchase or guarantee assets, be that whole loans or securities," says Karsten Moller, head of Europe and Asia at SIFMA. "Starting new mortgage lending is essential."

"The UK looks and smells a lot like the US - there is a heavy reliance on securitisation, it has declining property markets and mortgage finance is stuck."

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