Dan,
According to the Atom 1.0 spec it is only allowable to encrypt the root element of the document, be it a 'feed' or an 'entry'. This means that the intermediary, in this case Bloglines, would need to be given the key to decrypt the feed before it would be usable. While XML Encryption may be helpful in other situations, it doesn't help in this case where I don't want to hand over my password and/or key to an intermediary (Bloglines).
Atom does have a benefit, in that it can carry XHTML as a native format. That's good because microformats are really defined as a profile of XHTML.
If you don't want Bloglines to be able to see your key, you probably shouldn't put it in plaintext in the script (Greasemonkey scripts don't seem to be completely hidden from the page they are running on, at least at the moment: <http://diveintogreasemonkey.org/experiments/script-leak.html>).