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

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Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Last week, Treasuries rallied following the FOMC meeting, which left interest rates unchanged. The 10-year yield dropped 10 basis points from the prior week; as yields fall, bond prices tend to rise, and vice versa.

In a departure from the usual calm preceding a Fed meeting, Treasuries fell on Monday. Bond-market participants reacted to upcoming auctions and increasing expectations that the Fed will not cut rates into the first quarter of 2007. The yield on the 10-year dropped to 4.83%, and the yield on the two-year note reached a two-month high of 4.91%. Prices were little changed the next day.

Bonds rallied on Wednesday, enthused over the Fed's seemingly dovish stance, extending an ascent begun earlier that day on slipping existing home sales. The yield on the ten-year note fell to 4.76%. Treasuries rose again on Thursday, buoyed by weak new-home sales data and a weaker-than-expected durable goods figure. The yield on the ten-year note slipped to 4.73%. Weak gross domestic product figures, including the lowest growth rate since the first quarter of 2003, continued the rally on Friday. The 10-year yield reached a new three-week low of 4.67%.

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

  • The Treasury conducted several auctions last week, with these results:

    • $7 billion in five-year TIPS sold on Monday at a lower-than-expected yield of 2.691%;

    • $20 billion in two-year notes sold on Tuesday at a lower-than-expected yield of 4.894%; and

    • $14 billion in five-year notes sold on Thursday at a higher-than-expected yield of 4.687%.

  • Bill Gross, manager of PIMCO's Total Return Fund, reiterated his view that the Fed will cut rates in the first half of 2007.

  • The senior unsecured high-yield debt of Ford (NYSE:F) is on downgrade watch by Fitch and Standard & Poor's, a division of McGraw-Hill (NYSE:MHP), amid reports that the company may use more secured credit facilities to fund its operations.

  • A quarterly survey conducted by the Bond Market Association revealed that most dealers believe rates will remain unchanged through the end of the year, and that a possible rate cut may come in early 2007.

Hot tip
What can the bond market tell you about the housing market? Well, it can tell you that things don't look so good.

Traders of mortgage-backed securities point to the ABX Index, a measurement of risk inherent in owning bonds backed by home loans to people with poor credit, as an indicator of housing market health. According to Bloomberg, the index has risen 30% since early August, to the highest level since the start of the year. The increase indicates expectations of greater mortgage delinquencies and foreclosures.

Couple this data with a 13-year high in the number of homes for sale, an increasing percentage of home loan payment delinquencies, and the steep drop in new-home sale prices that appeared in last week's housing figures, and you can see that it doesn't take a supersleuth to detect the likelihood of continued deteriorating conditions in the housing market.

Fool contributor S.J. Caplan has been an undercover fixed-income aficionado ever since she served in banking and legal capacities covering debt underwriting and 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 Fool's disclosure policy never blows its cover.