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

Price ($)

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Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Last week provided plenty of economic releases on which the market could focus, and bonds liked what they saw.

Prices declined and yields crept up slightly on Monday, as traders positioned themselves for a flurry of economic data later in the week. For the following four days, prices rose. On Tuesday, the release of the minutes from the last Fed meeting gave traders the opportunity to optimistically read less of a hawkish tone into the Fed's stance on fighting inflation.

Bonds rose modestly again on Wednesday, assisted by weaker-than-expected economic data and month-end buying. Those purchases continued on Thursday, as prices rose again, further assisted by a report showing only a small increase in the price index for personal consumption. Friday's employment data initially caused prices to fall, when the market first thought that the stronger-than-expected figures lowered the odds for an interest rate cut next year. Buying resumed after a report showed slipping home sales, and prices closed slightly higher in a shortened holiday trading schedule.

The week ended with the 10-year note yielding 4.72%, its lowest yield since the end of March. For Investor 007, that means potential trading profits in issues he may hold. However, bonds may not be as attractive a place for him to park new money.

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

  • Managers of certain bond funds tracking the Lehman bond index were busy rebenchmarking their portfolios to account for the inclusion of the 30-year bond in the index.
  • Bonds of Ford Motor Credit, a division of Ford (NYSE:F), jumped on Monday, following reports that the company's financing unit may be sold. Although the financing business is profitable, the financial health of its parent hampers access to capital at better rates, because of the company's overall junk credit designation.
  • The Wall Street Journal reported that hedge funds are becoming more aggressive in enforcing debt covenants. Many bond indentures include provisions requiring timely filing of financial reports. While missing such deadlines technically renders the issuer in default and can trigger repayment, these technicalities used to remain unenforced by bondholders. Certain hedge funds are now changing this scenario, even pursuing issuers such as UnitedHealth (NYSE:UNH), which has delayed filing its financials amid its options backdating inquiries. Standard & Poor's is even developing a specialized group to focus on companies caught in the same scenario.

  • On Tuesday, the Treasury sold $22 billion in two-year notes at a 4.921% yield, and on Wednesday sold $14 billion in five-year notes at a 4.738% yield.

Hot tip
An inverted yield curve refers to the scenario in which short-dated Treasuries yield more than longer-dated maturities. The current configuration is partially inverted, with the six-month Treasury bill yielding 5.09%, higher than even the 30-year bond. If you think about it, that makes little sense -- why shouldn't one be compensated at a higher rate for the inherent risk in owning a security for a longer time period? While a fully inverted yield curve is often seen as a recessionary indicator, some believe the current situation reflects heightened demand from foreign investors. In any case, a savvy saver like Investor 007 can exploit this situation to stash cash, shielding himself with the safety of the short-term bills and their high yields, which are now greater than most bank certificates of deposit.

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Fool contributor S.J. Caplan has been an undercover fixed-income aficionado ever since she served in banking and legal capacities, covering both debt underwriting and fixed-income derivatives. She owns U.S. Treasuries, and prefers her portfolio shaken, not stirred.