NEW YORK (Bloomberg) - American International Group Inc., the bailed-out insurer with a $355 billion fixed-income portfolio, may report gains from the rally in corporate bonds and mortgage-backed securities in the third quarter.

Investment-grade US bonds returned 8.3 percent in the period, following 11 percent in the second quarter, the best gain since 1982, according to Merrill Lynch & Co., and some home-loan bonds reached prices almost double their March lows. Almost 60 percent of AIG’s bond portfolio as of June 30 was in corporate debt and securities tied to residential mortgages.

“They’re going to get a big pop on a mark-to-market basis and have higher earnings,” said Haag Sherman, who helps oversee $7.5 billion as chief investment officer of Houston-based Salient Partners. “It’s a modest positive, more about the vicissitudes of the market than the sustainability of their recovery, which is still in question.”

AIG was rescued in 2008 after banks that bought protection on mortgage-linked assets drained the New York-based insurer of cash as the market value of the securities plunged. The U.S. propped up the company with three more bailouts through March as investment declines put AIG at risk of credit-rating downgrades that would have forced further payments to securities firms.

The Financial Products unit that sold the derivatives may report that some of its losses reversed in the period ended Sept. 30, showing a $2.5 billion gain, Credit Suisse Group AG analyst Thomas Gallagher said this week in a note.

AIG may post a $2.39-a-share operating profit tomorrow, when it is scheduled to release third-quarter results, according to the average estimate of three analysts surveyed by Bloomberg. In the year-earlier quarter, it had a $68.40-a-share operating loss on derivatives, adjusted for a reverse stock split.

The insurer has quadrupled in the past eight months on the New York Stock Exchange as bond markets rallied. AIG posted net income of $1.82 billion in the second quarter this year, its first profit since 2007, on narrowing investment losses and a rebound in the value of some derivatives.

Last year, the insurer’s stock plunged 97 percent as AIG reported a $99 billion annual loss driven by declines on credit- default swaps and investments.

Debt markets surged as investors became less concerned about defaults amid signs of an economic recovery. The U.S. economy returned to growth in the third quarter after a yearlong contraction as government incentives spurred consumers to spend more on homes and cars. The world’s largest economy expanded at a 3.5 percent pace from July through September, Commerce Department figures showed last week.

State and local government bonds returned 8.1 percent during the July-through-September period, the best quarter in at least two decades, according to Merrill Lynch’s Municipal Master Index. AIG held more than $50 billion of municipal debt as of June 30.

AIG pleaded successfully in February for its fourth bailout by saying it is the largest corporate bond investor in the U.S. and that its commercial insurance operation was the No. 2 holder of municipal debt. Had the company been allowed to collapse, it may have had to liquidate holdings, disrupting markets, AIG said in a Feb. 26 document.

MetLife Inc., the largest U.S. life insurer, said that $15.4 billion in unrealized losses on corporate bonds reversed in the six months ended Sept. 30. The company had an unrealized gain on the securities of about $870 million at the end of the third quarter, according to a filing yesterday, compared with a loss of $15.4 billion on March 31. Unrealized losses, which aren’t usually subtracted from earnings, are monitored by ratings firms and investors as a measure of financial strength.

AIG’s bonds available for sale were valued at about $355 billion on June 30, and comprised more than half the insurer’s $619 billion of invested assets. Holdings also include mortgage loans, stocks, and flight equipment.

AIG, which had about $19 billion in private-equity and hedge fund holdings as of June 30, probably earned about $700 million from the assets in the quarter, Gallagher said. Hedge funds returned 6.9 percent in the quarter, according to data compiled by Chicago-based Hedge Fund Research Inc.

The insurer’s life and property-casualty units may report declining premium revenue, Gallagher said. U.S. variable annuity sales fell for a fifth straight time in the second quarter as insurers, weakened by the stock market slump last year, scaled back offerings of the equity-linked retirement products.

Sales of US property and casualty coverage industrywide fell 1.4 percent to $434.6 billion in 2008, the biggest drop in half a century, and the slump continued this year, according to the Property Casualty Insurers Association of America.

“There are increasing numbers of failed businesses and reduced payrolls,” Chubb Corp. Vice Chairman John Degnan said in a conference call Oct. 22. “The negative impact of the economy on the insurance market increased in the third quarter.”

AIG propped up its International Lease Finance Corp. plane- leasing unit, the biggest customer of Boeing Co. and Airbus SAS, by extending $2 billion in credit last month. AIG’s loan to ILFC helped push the insurer’s draw on a Federal Reserve credit line to $44.8 billion, the highest since May. AIG also paid down debt on a government commercial paper facility using its Fed line.

AIG has secured agreements to raise more than $12 billion by selling businesses including a US auto insurer, an equipment guarantor and a Taiwan-based life unit. Chief Executive Officer Robert Benmosche, who took the post in August, said he wouldn’t be hurried by regulators to sell units at unfavorable prices.

The insurer was rescued in September 2008 with a package that swelled to $182.3 billion, including a $60 billion Federal Reserve credit line, a Treasury Department investment of as much as $69.8 billion, and up to $52.5 billion to buy mortgage-linked assets owned or backed by the insurer. The US took a stake of almost 80 percent as part of the bailout.