Is turning from guns to butter bearish for Treasury bonds?

With Iraq vanquished from Kuwait and the Persian Gulf war over, the Treasury bond market was spooked this week by a number of concerns, including rumors Kuwaitis were liquidating dollar-denominated holdings to fund the emirate's reconstruction and hints that the U.S. recession will be short-lived.This touched off a spike in interest rates and a sell-off Friday - just two weeks after the market reached recent highs - that one analyst called "definitely a panic."

"There's been a meltdown. It's collapsed," said Christopher A. Rupkey of Mitsubishi Bank in New York.

The benchmark 30-year Treasury bond, the 77/8 maturing in 2021, ended Friday's trading at 95 15/32 for a yield of 8.29 percent, vs. 97 27/32 to yield 8.06 percent a week earlier.

The expected demand for capital to finance Kuwait's reconstruction held out the prospect for higher U.S. interest rates, some said.

Further complicating the picture was a slew of economic statistics that gave mixed signals on whether the U.S. economy is continuing to deteriorate or not, leaving the outlook for interest rates murky.

On the negative side, the government's Index of Leading Economic Indicators, a key barometer of U.S. economic health, decreased 0.4 percent in January. For the six months through January, the index tumbled 4.9 percent as a result of uncertainty over the Persian Gulf.

Moreover, the government reported that Americans' personal income and outlays fell in January.

But there were signs of economic recovery too - prompting skepticism that Federal Reserve Chairman Alan Greenspan has any leeway left to get the central bank to ease credit policy further and bring down interest rates, at least in the short term.

Standard & Poor's Corp. chief economist David Blitzer still sees room for the Fed to ease and looks for the long Treasury's yield to be at 71/2 percent in the second quarter.

Treasuries, with their guaranteed returns, usually appreciate on signs of economic distress. Their fixed coupon rates also look attractive to investors in the face of moves by the Fed to nudge interest rates down by pumping more money into the economy.