Investor 007's Bond Dossier

Meet Investor 007. His specialty? Bonds. Fixed-income bonds.

Don't be fooled by their low-profile reputation. Beneath that cunning disguise, bonds are sophisticated tools to help safeguard your portfolio from the perils of riskier investments. Here's the latest intelligence on their high-stakes world. If you're new to the game, get briefed on the basics of Investor 007's business, or check out our Bond Center for some useful gadgets to help ensure a successful investing mission.

Spying on rates
The benchmark U.S. Treasuries are key rates to keep under surveillance. Corporate issues are generally priced at a spread to a Treasury rate with a similar term, based on the issuer's credit rating.

Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Last week, Treasuries closely followed moves in the stock market -- up to a point. They posted their largest losses of the year after the February jobs report reduced the likelihood of near-term interest rate cuts. For the week, the benchmark 10-year yield rose nine basis points to 4.72%, its first increase in six weeks. Bond prices move inversely to yields.

Initially trading higher on Monday, as the flight to bond safety from the ravages of the stock market continued, prices slipped later as profit-taking kicked in. A rebound in global equities pushed Treasuries lower on Tuesday, as the perceived need for a safe haven declined. Weak manufacturing and housing reports stemmed losses, and the 10-year yield rose four basis points to 4.53%, only to surrender three of those points on Wednesday.

Prices slipped on Thursday as stocks rose in an otherwise quiet day, with the 10-year yield reclaiming four basis points to 4.51%.

The employment data arrived on Friday, and its indication of a stronger-than-expected economy sent Treasuries sliding, with the particularly rate-sensitive two-year yield soaring 10 basis points to 4.66%.

Detecting developments
Investor 007 noted the following occurrences in the bond market last week:

• The yield curve continued to invert, with the two-year yield differential over the 10-year yield registering seven basis points.
• A widening of risk premiums on financial-sector bonds occurred in issuers such as Merrill Lynch (NYSE:MER), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS).
• American Cellular, a unit of Dobson Communications (NASDAQ:DCEL), dropped plans to issue a $425 million junk bond offering, citing bond market volatility.
• Eli Lilly (NYSE:LLY) issued $1 billion in 10-year notes, $700 million in 20-year bonds, and $800 million in 30-year securities in its largest bond sale ever, with proceeds to repay debt in connection with its acquisition of Icos.
• General Electric (NYSE:GE) sold $4 billion in three-year floating notes, the largest bond offering of the week.
• Federated Department Stores (NYSE:FD) sold $1.6 billion in five-year notes and 30-year securities, more than double the amount projected, containing a change-of-control covenant aimed at protecting shareholders from potential takeover consequences.
• Intuit (NASDAQ:INTU) sold $1 billion worth of five- and 10-year notes in its first debt offering.

Hot tip
Investor 007 enjoys a mystery, but some secrets can be dangerous.

As reported recently by Bloomberg News, one of the consequences of the corporate-fraud-fighting Sarbanes-Oxley law is a rise in bond market secrets -- unregistered bond sales. The article cited a 50% rise in such issuance over the past two years, with $300 billion outstanding.

By avoiding SEC registration, corporations can pocket savings while enticing investors with an average additional 11-basis-point yield premium. The more than 100 corporations that have sold private bonds include Miller Brewing, Siemens, and Hutchison Whampoa.

For investors, unregistered bond sales obscure the transparency sought in securities disclosure. Trades take place between institutions, so they're not required to be reported on the NASD's TRACE corporate-bond-price distribution database.

The corporate bond default rate currently occupies its lowest point in 25 years, but that doesn't mean that the environment can't or won't change abruptly, as the recent equity swoon reminded us. An economic slowdown or other event can have a greater negative impact on these securities due to their limited investor base.

If you're wooed by the higher yields offered on unregistered bonds, be prepared to take on the risk.

Eli Lilly is a Motley Fool Income Investor pick, while Intuit was a former Inside Value selection. Try any of our Foolish newsletters free for 30 days.

Fool contributor S.J. Caplan has been an undercover fixed-income aficionado ever since serving in banking and legal capacities covering debt underwriting and fixed-income derivatives. She owns U.S. Treasuries and shares of the Fidelity Inflation Protected Bond Fund and Goldman Sachs. She prefers her portfolio shaken, not stirred. Our disclosure policy is for Foolish eyes only.