Bonds fret over stock market, China

NEW YORK (CNNMoney.com) -- Treasurys ended a volatile trading day mixed Friday as stocks managed to pull out gains for a fourth day in a row.

But bond investors also reacted to a speech by Chinese Premier Wen Jiabao in which he expressed concern that the mammoth amounts of Treasury debt his country holds will deteriorate in value.

"We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets," said Wen at his annual news conference on Friday. "To speak truthfully, I do indeed have some worries."

China owns more than $727 billion of U.S. debt, more than 6% of the $10.9 trillion of U.S. debt outstanding, according to the Treasury Department.

Wen said he was concerned that America's record deficit spending would cause an inflationary spike that would diminish the value of China's assets. The premier called on the U.S. government to help guarantee the safety of China's assets by "maintaining creditworthiness" and engaging in responsible economic policies.

Yet, while bonds were down, they were relatively calm compared to some of the much larger drops the market has seen in the past weeks - and there was at least some discounting of the China issue.

"China, as well as everybody else, is worried about the impact of the massive amounts of stimulus and the subsequent runup in the deficit," said Kim Rupert, fixed income analyst at Action Economics.

With $787 billion it will owe for stimulus, $700 billion for the bank bailout and trillions more in liquidity programs, the Treasury expects to issue between $2.7 trillion - $4.2 trillion of debt over the next two years.

Treasurys fell sharply earlier in the week when investors had expressed concern that this week's auctions would not be met with adequate demand.

But Treasury successfully completed a $63 billion sale this week, attracting more than enough investors to fund the debt offerings. Bonds rose in the past two days on the renewed confidence.

Some analysts said they believe that the United States will continue to attract foreign investors, especially from Asia, as droves of weak economic data from around the globe continue to suggest a drawn-out recovery. With stocks still unable to prove they can maintain a long rally and commodity prices in flux, U.S. government debt has remained relatively attractive.

"Eventually, we know the dollar is going to get trashed, but for now, we're in the middle of a crisis," said Peter Cardillo, chief market economist at Avalon Partners. "I think this is all just rhetoric."

Still, not all are convinced that investors will continue to demand Treasurys when interest rates are again falling close to uncharted territory.

"The U.S. is faced with massive borrowing requirements that necessitate demand from everyone we can find," said Rupert. "I think that everyone is pretty worried about the future of U.S. debt."

Bond prices: Bond prices were lower in morning trade when stocks were higher, rallied as Wall Street lost its traction in midday trade, but then fell again as Wall Street ended the day higher.

The benchmark 10-year note edged down 9/32 to 98 25/32 and its yield rose to 2.90% from 2.86% Thursday. Bond prices and yields move in opposite directions.

The 30-year bond fell 1 3/32 to 96 27/32 with a yield of 3.68%, up from 3.62%.

The 2-year note edged up 3/32 to 99 27/32 and yielded 0.97%, down from 1.02%.

The 3 month bill yielded 0.21%, up from 0.20%.

Lending rates: The 3-month Libor rate held at 1.32%, according to data on Bloomberg.com. The overnight Libor rate held steady at 0.33%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.

Two credit market gauges were mixed. The "TED" spread narrowed to 1.11 percentage point from 1.12 percentage points. The less wide the TED spread, the more willing investors are to take risks.

The Libor-OIS spread widened to 1.08 percentage point from 1.07 percentage points the prior day. A wider spread indicates that less cash is available for lending.