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Investor 007's Bond Dossier

S.J. Caplan
July 2, 2007

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.

U.S. Treasury


Yield (%)













Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Last week, Treasury prices gained for the second consecutive week, as the Fed unsurprisingly kept rates unchanged. For the week, the two-year note yield slipped 3 basis points to 4.87%, while the 10-year yield declined 10 basis points to 5.03%, and the 30-year yield dropped 13 basis points to 5.12%. Still, the second quarter ended with the worst quarterly performance of Treasuries in more than a year, with the benchmark 10-year yield climbing 38 basis points. Bond prices move inversely to yields.

The flight to quality begun the prior week over subprime concerns continued on Monday. A weak home sales report also spurred purchasing, and Treasuries rallied. The two-year yield declined to 4.87%, its lowest rate this month, and the 10-year yield fell 5 basis points to 5.08%. Prices slipped on Tuesday, following a report of a decline in new home inventories. The two-year yield tacked on 1 basis point, while the 10-year yield increased by two basis points. On Wednesday, a surprisingly weak durable goods report sent prices initially higher, before they dropped back to close little changed.

Treasuries languished Thursday morning, ahead of the FOMC afternoon announcement on interest rates. Prices fell once news broke that the benchmark lending rate will remain at 5.25%, with inflation cited as the greatest risk to the economy. The two-year yield rose 5 basis points to 4.94%, while the 10-year yield rose 3 basis points to 5.11%.

Prices rallied on Friday. Various factors contributed to the buying, including a terrorist scare in the U.K., tame consumer price inflation data, and month-end purchasing. The two-year note yield staged its largest drop in since March, and declined 7 basis points.

The market will close at 2:00 tomorrow and remain closed on Wednesday to celebrate July 4.

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

  • The U.S. Treasury sold $18 billion in two-year notes on Tuesday at a yield of 4.906%, and sold $13 billion in five-year notes on Wednesday at a yield of 4.94%.

  • A group of Tyco (NYSE: TYC  ) bondholders joined a lawsuit trying to stop the company's planned spinoff of its electronic and health-care businesses, because of the company's alleged failure to obtain bondholder consent.

  • The SEC has opened 12 enforcement investigations into matters involving collateralized debt obligations (CDOs).

  • JPMorgan Chase (NYSE: JPM  ) said that the amount of high-grade CDOs backed primarily by subprime mortgages has dropped to $3 billion, from $20 billion a month ago.

  • Moody's (NYSE: MCO  ) said that it expects to downgrade more CDOs this year than it did last year.

  • Thomson Financial reported that U.S. high-yield bond issuance rose in the first half of the year to $93.7 billion, compared to $65.4 billion a year ago.

  • Underwriters indefinitely postponed a $1.55 billion bond offering by U.S. Foodservice.

  • U.S. bank regulators issued tighter standards for mortgage lending to curtail risky practices.

  • The following corporations issued debt in the public market:
    • Equifax (NYSE: EFX  ) sold $300 million in 10-year notes.
    • Suncor Energy (NYSE: