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

Yield

2-year

$100.03

4.81%

5-year

$99.21

4.69%

10-year

$101.05

4.72%

30-year

$95.03

4.81%



Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Although the yield on the 30-year bond picked up only 2 basis points from the prior Friday, bond watchers witnessed a volatile week. When all was said and done, signs of rising inflation and slowing growth significantly curtailed expectations for a Fed easing. Bond prices move inversely to yields.

Treasuries were little changed on Monday following the release of mixed personal spending and income data. On Tuesday, prices climbed following a decline in manufacturing activity in Chicago, slipping consumer confidence across the country, and month-end purchasing.

A national report that showed manufacturing at its slowest growth rate in more than three years, coupled with continued weakness in home sales, spurred a rally on Wednesday. The yield curve inverted further, as the yield on the 10-year note dropped to a one-month low of 4.56% and the three-month bill yielded 5.06%.

On Thursday, prices fell amid data showing flat productivity but rising labor costs. Finally, prices fell broadly on Friday following the release of September's employment data depicting a healthy labor market, with the unemployment rate at a five-year low. The yield on the 10-year note dropped 12 basis points to 4.72%.

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

  • The Treasury reduced its amount of planned borrowings for this quarter by 39%, because of a rise in tax revenues.

  • The Treasury Department announced that it will send a representative next week to a meeting called by the Federal Reserve Bank of New York concerning possible market manipulation.

  • The Wall Street Journal reported that the SEC is examining questionable government securities trading by UBS (NYSE:UBS) in February.

  • Bank of America (NYSE:BAC) and Countrywide Financial (NYSE:CFC) both issued separate hybrid debt offerings with small denominations, aimed to entice retail investors.

Hot tip
Keep your eye on the I Bond.

I Bonds are U.S. savings bonds that earn interest monthly; the interest is accrued for the 30-year life of the bond and paid upon redemption. The interest component consists of a fixed rate, which remains constant until maturity, and a variable measure of annualized inflation, which is reset each May 1 and Nov. 1. The variable rate is determined by the change in the consumer price index for urban consumers.

Advantages of I Bonds include features such as availability in barious amounts, from a minimum purchase of $25 to a maximum of $30,000. Sold at face value, they are fairly easy to understand, especially if one is already familiar with savings bonds. They can be redeemed after one year, although penalties are incurred for doing so before five years. Unlike with TIPS, there is no secondary trading market in I Bonds. Interest is exempt from state and local taxes, and federal taxes can be deferred until the bonds are redeemed.

Last Wednesday, the Treasury reset the rate on I Bonds to 4.52% for bonds purchased through April 2007, including a 1.4% fixed rate and a 3.1% variable rate. The new composite rate stands well above the previous 2.41% rate for I Bonds bought after April 30.

For investors seeking to gain some inflation protection and to defer interest income, or for those who desire a small minimum investment, I Bonds offer advantages unavailable from other investments.

Bank of America is a Motley Fool Income Investor recommendation. Try out our Foolish newsletter service dedicated to finding the market's best dividend-paying stocks -- it's free for 30 days.

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 does owns 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.