China needs to guard against volatility in U.S. Treasury prices should investors demand higher returns from U.S. government debt, a researcher at the Chinese central bank said on Monday.

Zhang Jianhua, a head of research at the People's Bank of China, said worries that the heavily indebted U.S. government may not repay its debt could drive Treasury yields higher and cause U.S. debt prices to fluctuate.

Investor concerns that U.S. Treasury yields may spike higher came to the fore last week when Standard & Poor's threatened to cut the United States' prized AAA credit rating unless it reduces its yawning budget deficit.

As the biggest foreign buyer of U.S. Treasuries, China is especially sensitive to fluctuations in U.S. debt prices and has periodically sought assurances that its investments would be protected.

But price volatility aside, Zhang was otherwise confident that demand for U.S. Treasuries would stay healthy due to lack of investment alternatives, if nothing else.

The S&P cautionary note had little impact on Treasury purchases by foreign central banks, which continued to grow in the week ended April 20. The Fed said its holdings of U.S. securities kept for overseas central banks rose $14.09 billion during the week to stand at $3.423 trillion.

Due in part to its size, the U.S. Treasury market is deemed to be among the safest in the world as it allows investors to buy and sell without prices swinging too much.

But the gigantic-and-growing market is also a sign of poor U.S. fiscal health. U.S. government debt is expected to hit its $14.3 trillion ceiling as early as May.

China owned $1.154 trillion in U.S. government debt in February, U.S. data showed.

(Reporting by Koh Gui Qing; Editing by Ken Wills)

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