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. Following is 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

Yield

2-year

$99.24

4.73%

5-year

$99.12

4.64%

10-year

$101.12

4.69%

30-year

$94.24

4.83%

Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. While the stock market rallied last week, bonds fluctuated and ultimately declined, spooked by stronger economic data.

Treasuries closed higher on Monday, helped by a weaker-than-expected manufacturing report. On Tuesday, while the Dow was busy hitting an all-time record-high closing level, bonds slipped. Rising stock prices and declining oil prices combined to lead many traders to think that economic strength may delay any future interest rate cuts. The 10-year yield picked up a single basis point in narrow trading.

Treasuries gained along with stocks on Wednesday, following the release of data showing a slowdown in the services sector and an acknowledgement by Fed Chief Ben Bernanke of a "substantial correction" in the housing market. The 10-year yield dropped to 10.559%. On Thursday, hawkish inflation-fighting remarks from the Fed's vice chairman and the Philadelphia Fed president pushed Treasuries down, and yields on the two-year and 10-year notes went to 4.65% and 4.6%, respectively.

Friday's widely awaited September jobs report revealed weaker-than-expected payroll gains, a drop in the unemployment rate, and a large upward preliminary revision to March figures. The data suggested a stronger labor market than previously thought -- thus weakening the market's bias for a future rate cut -- and sent Treasuries to their lowest prices since June. In pre-Columbus Day shortened trading hours, the yield on the two-year rose to 4.73% and the 10-year to 4.69%, to reach a new two-week high.

The bond market will take Columbus Day off to relax a bit, while the stock market remains open.

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

  • Standard & Poor's, a division of McGraw-Hill (NYSE:MHP), lowered the ratings of Harrah's (NYSE:HET) to junk status following the company's announcement that it is in leveraged-buyout discussions.

  • Thomson Financial stated that merger activity has spurred global debt issuance, which has increased 9% this year to more than $5 trillion, the highest ever for any three-quarter period.

  • Bloomberg reported that while corporate bonds have gained the most since 2003, Lehman Brothers (NYSE:LEH) had recommended in June cutting back on investment-grade, high-yield, and emerging-market debt. The firm changed its advice in September and began bumping up its suggested fixed-income allocations since then.

  • The European Central Bank president said that more rate increases may be coming after that bank raised rates last week for the fifth time in 10 months.

Hot tip
Investor 007 has a healthy appetite for bonds but prefers them to make up a liquid diet. Liquidity risk arises when bonds don't have an active secondary trading market. If you need to redeem an issue before maturity, you might receive less than what you originally paid.

Liquidity risk doesn't usually appear in the Treasury market, but it is an issue to consider before you purchase corporate debt. One source Investor 007 likes to use for information on corporate bond trading activity is the TRACE (Trade Reporting and Compliance Engine) databank supplied by the NASD. This free tool allows investors to search for investment-grade, junk, and convertible bonds using reported data, as well as check out the corresponding trading levels.

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 and shares of the Fidelity Inflation Protected Bond Fund. She prefers her portfolio shaken, not stirred. The Motley Fool has a disclosure policy.