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.

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Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Ironically, the Fed's decision on interest rates did less to move the market than did a more obscure regional report on business conditions released later in the week. For the week, bond prices enjoyed a strong rally, with the 10-year note posting its largest weekly gain in 17 months.

The Treasury market got off to a negative beginning on Monday, with various culprits to blame. Among the guilty were a record-setting budget account deficit for the second quarter, a report showing that foreign demand for U.S. investments dropped in July, and plain ol' profit taking prior to the Fed meeting. On Tuesday, Treasuries rose sharply following weak producer price index data and housing starts figures. The Thai coup also contributed to a flight to quality, and the 10-year yield pared back to 4.74%.

Prices remained largely unchanged following the Fed's widely expected decision announced on Wednesday to leave interest rates unchanged. The yield on the 10-year dropped one basis point to register 4.73%, while the yield on the more sensitive two-year note picked up one basis point to yield 4.81%.

The Philadelphia Fed's survey of business conditions in the mid-Atlantic caught the market by surprise on Thursday. The data showed a steep decline in the index, as it registered in negative territory for the first time in over three and a half years, indicating a contraction in the economy. Prices rose sharply and yields on the 10-year slipped to six-month lows of 4.64%, while the two-year yielded 4.69%. These levels were taken out the following day as the rally continued, sending the 10-year yield to 4.59% and the two-year yield to 4.66%.

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

  • A U.S. bankruptcy court blocked Adelphia bondholders from filing a competing bankruptcy plan which would have included a provision to resolve creditor disputes.
  • Ford (NYSE:F) suffered another lowering in its credit rating from both Standard & Poor's, a division of McGraw-Hill (NYSE:MHP), and Moody's (NYSE:MCO) when both ratings agencies cut their junk ratings another notch, reflecting their dismal views of the automaker's latest restructuring efforts.
  • Washington Mutual (NYSE:WM) became the first U.S. corporation to access the European covered bond market by completing a covered bond offering of five- and 10-year notes.
  • Corporations across industries continue to sell new bonds, taking advantage of the lowest borrowing costs in six months and tight spreads.
  • Following Thursday's dismal data from the Philly Fed, futures traders reversed their view from the prior day's forecast of a 10% chance of an interest rate hike by year-end to a 10% likelihood of a cut by the end of December.
  • Ah, dinner party intrigue! The Wall Street Journal reported that a rumor circulating Friday concerning former Fed chairman Alan Greenspan purportedly saying in a private speech the preceding evening that the Fed will cut rates next year may have helped Friday's rally. People who attended the event denied that any such remarks were made.

Hot tip
Could now be the right time to add some junk to your portfolio?

According to Bloomberg, S&P has lowered its forecast for junk bond default levels over the next 18 months, and Lehman Brothers (NYSE:LEH) is recommending that clients overweight their junk holdings by 5%. In addition, Moody's recently reported that the high-yield default rate worldwide fell to 1.6% last month -- its lowest level in almost 10 years. The ratings agency does, however, forecast a marginal increase to 2.1% by year-end and to 2.4% next August.

Investor 007 is accustomed to nothing but the best and is not one to sacrifice quality. At times like these, though, junk doesn't look too shabby. With plenty of inventory from which to choose and a comfort level with risk, it might make sense to seize the moment and investigate shorter-range maturities. If the economy does contract, as data is increasingly suggesting, more companies will experience problems, and the opportunity for a relatively safer junk bond junket may close.

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Fool contributor S.J. Caplan has been an undercover fixed income aficionado ever since serving in banking and legal capacities covering debt underwriting, as well as fixed income derivatives. She does not own shares of any of the companies mentioned, but she does own U.S. Treasuries. She prefers her portfolio shaken, not stirred. The Fool has a disclosure policy.