June Treasury Notes and June Treasury Bonds are trading lower overnight on concerns about future interest in U.S. government debt from China. Overnight China’s Premier Wen Jiabao said he was concerned about the safety of U.S. government debt. He went on to say that the U.S. must do its part to protect the safety of its assets invested in the U.S. treasury markets. This news is leading traders to lighten up positions. It is a well-known fact that China is the largest holder of U.S. government debt and that the U.S. needs to have them continue to invest in its debt instruments to finance this country’s debt. Given the financial situation of the global community, it will be difficult to find a replacement if China cuts back on its purchases of U.S. debt.

U.S. interest rates may rise if other countries begin to question the safety of U.S. debt. This could be a disaster for the U.S. economy as it tries to recover from the current recession.

The good news this week is the government debt auction went well as demand was huge. This helped lower interest rates. Before the auction started, many traders were concerned that demand would be light and that investors would drive down bond prices by asking for higher yields.