Despite China’s jitters, Treasury bond market stays calm

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The Treasury bond market hiccuped early today after Chinese Premier Wen Jiabao expressed nervousness about the ‘safety’ of U.S. debt.

But a modest rise in yields on long-term Treasury bonds quickly brought buyers back into the market, which has been remarkably resilient in recent weeks despite Uncle Sam’s huge ongoing borrowing wave.

The 10-year T-note yield, which jumped as high as 2.97% this morning, ended the day at about 2.89%, flat with Thursday’s closing yield. The 30-year T-bond edged up to 3.67% from 3.63% on Thursday. Yields on shorter-term Treasuries ended mostly lower for the day.

At a press briefing in Beijing today, Wen noted that China had ‘lent huge amounts of money to the United States,’ making China America’s single biggest creditor.

‘To be honest, we are a little bit worried,’ Wen said. ‘We hope the United States honors its word and ensures the safety of Chinese assets.’

What was his point? The Chinese may be legitimately worried about record U.S. borrowing this year to fund the Obama administration’s rescues of the economy and the financial system. Government stimulus spending is expected to be a key discussion point at this weekend’s meeting of finance ministers of the Group of 20 nations in London.

If investors begin to balk at Treasury debt, forcing yields up dramatically, that would devalue China’s holdings of older fixed-rate Treasuries.

Wen also may have been warning the U.S. against badgering China on the issue of its currency’s value against the dollar. China has resisted allowing its currency to appreciate quickly against the greenback, for fear of driving up prices of Chinese exports for U.S. buyers.

‘I think it’s a lot of political posturing for currency purposes,’ said John Spinello, a market strategist at brokerage Jefferies & Co. in New York.

Despite Wen’s jitters, the Treasury market still is basking in the glow of surprisingly strong investor demand this week as the government sold $18 billion in new 10-year T-notes and $11 billion in 30-year T-bonds Wednesday and Thursday, respectively.

A wild card that continues to buoy the market is the possibility of the Federal Reserve stepping in to buy Treasury bonds for its own account. The Fed has said in recent months that it was considering the move as a way to push long-term interest rates lower, to help the economy. Fed policymakers are expected to provide an update on their thinking when they meet Wednesday.

The Bank of England last week said it would begin buying British government bonds -- and the market reaction was dramatic: The yield on 10-year British bonds has plunged to 2.94%, down from 3.64% on March 4.

With that kind of response, bond traders are reluctant to sell Treasuries now, figuring the Fed could work some of the same magic if it decides to jump into the market, said Lou Crandall, chief economist at bond research firm Wrightson ICAP in Jersey City, N.J.

-- Tom Petruno