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















Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Last week, bonds stemmed a three-week slide and generally treaded water amid increased sentiment that the Fed will leave interest rates unchanged into next year. Bond prices move inversely to yields.

On Monday, mixed data showing strength in manufacturing but a decline in new orders didn't have much effect on bonds, and prices moved up slightly. Treasuries gained on Tuesday after shrugging off a weaker-than-expected Producer Price Index report, instead focusing on reports of a record $116.8 billion in foreign U.S. securities purchases in August. Later, data showing an increase in the number of new homes sold pared some of those gains, leaving the yield of the 10-year note at 4.77%.

On Wednesday, a mixed CPI report left Treasuries mainly unchanged until unexpected strength in September housing starts dragged them a bit lower. The two-year note felt more pressure, moving its yield as high as 4.88% before settling back to 4.85%, while the 10-year yield slipped 1 basis point to 4.76%.

Treasuries fell Thursday because of underlying strength in the Philly Fed survey, a strong jobless report, and news that Bank of America (NYSE:BAC) plans to trim its securities holdings by $100 billion over the next two years. The yield on the 10-year rose to 4.78% and tacked on another basis point in lethargic trading on Friday.

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

  • Dura Automotive (NASDAQ:DRRA) wasn't looking too durable when it announced Monday that it would not make a $17.3 million interest payment that was then due on its $400 million 8.625% notes due in 2012. The company has a 30-day grace period before the missed payment constitutes a default, but the S&P already cut its credit rating four notches to "D," noting a high risk of bankruptcy.
  • Bear Stearns (NYSE:BSC) raised its recommendation of homebuilders' bonds to "market weight," finding them more attractive as the economy is strengthening and inventories are being adjusted. Lehman Brothers (NYSE:LEH) recommended greater exposure to the sector the prior week.
  • Rating agency Fitch cautioned that bondholders can remain vulnerable to losses despite change-of-control provisions in bond covenants designed to protect them from greater leverage and downgrades that often accompany buyouts.
  • Bill Gross, manager of PIMCO's Total Return Fund, assuming that the Fed has finished raising rates, increased the fund's holdings of Treasuries and agency debt in September to a nine-month high.

Hot tip
In that classic board game Clue, players get to play detective and guess who committed a crime and how it was committed. Investor 007 has been playing his own version of that game with respect to the peculiar behavior of the stock and bond markets.

Typically, when stocks rally on economic strength, bonds decline, and vice versa. Over the past several months, the markets have moved similarly.

Investor 007 has deduced that there may have been more than one culprit to blame. Lower oil prices have helped the consumer and businesses while lowering inflation, which has aided both markets. Housing-market concerns have also helped support bond prices. The final clue is actually noted in the week's activity above. Hint: See Tuesday.

Did you find it? The Treasury Department's report of a record amount of foreign purchases of U.S. securities in August fingered the other suspect. Foreign intrigue played a role in providing a significant underpinning of strength in bonds. The figure climbed $84 billion from the prior month and included $46.3 billion in purchases of Treasuries, the most in more than three years. After largely shunning the market when the Fed was on its campaign of rate hikes, The Bank of Japan emerged again as a significant purchaser, having bought $7.6 billion in Treasuries.

Bank of America is a Motley Fool Income Investor recommendation. See what other stocks make up the portfolio at our dividend newsletter service by taking a free, 30-day trial.

Fool contributor S.J. Caplan has been an undercover fixed-income aficionado ever since she served 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 does own U.S. Treasuries and shares of the Fidelity Inflation Protected Bond Fund. She prefers her portfolio shaken, not stirred. The Fool has a disclosure policy.