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. Weak economic data propelled longer dated Treasuries higher last week, with participants continuing to project interest rate cuts early next year. The yield curve ended the week at its most inverted since December 2000. Bond prices move inversely to yields.

Treasury prices closed slightly higher Monday, after getting off to a weak start. Indications of a strong retail sector initially drove prices down, but bonds regained strength as a continued declining dollar underpinned notions of future Fed rate cuts. The yield on the 10-year note fell to 4.53%, down seven basis points from earlier in the session.

Treasuries climbed higher on Tuesday on soft consumer confidence and durable goods data, as well as strong demand in the two-year note auction. Even comments from Fed Chief Ben Bernanke regarding inflation risks and a hawkish tone from the Philly Fed president did not deter the upward action. The yield on the 10-year note dropped to 4.50%, two basis points below its trading range since the end of August.

Prices declined slightly on Wednesday, following mixed economic data. On Thursday, Treasuries resumed their upward trend. The yield on the 10-year note reached 4.46%, the lowest since the beginning of the year, as bonds rallied on weak Midwest manufacturing data and month-end buying. Bonds continued to climb on Friday on additional weak manufacturing and construction figures, and the 10-year yield tacked on another three basis points.

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

  • Ford (NYSE:F) announced plans to issue up to $18 billion of new debt in order to pay for factory closures and job cuts amid its record losses. The issuance will include $15 billion of asset-backed loans, marking the first time that the company is using collateral to secure its debt.

  • The Treasury conducted the following auctions:
    $20 billion two-year notes were sold to strong demand on Tuesday at a lower-than-expected 4.692% yield; and $14 billion five-year notes were sold on Wednesday at a greater-than-expected 4.507% yield, the lowest since January.

  • Citadel Investment Group will become the first hedge fund to issue debt when it sells $500 million worth of medium-term notes this week.

  • Moody's (NYSE:MCO) deemed the outlook for the credit ratings of retail and apparel companies negative, because of slowdown in consumer spending coupled with new issuance arising from leveraged buyouts or acquisitions.

Hot tip
What can the dollar tell you about debt?

Just as there are two sides to a coin, there exist two sides to the dollar debate. The dollar's slide last week captured the attention of many bond market participants. Some blamed the declining dollar for limiting gains in Treasuries, while others didn't seem to mind, believing that its weakness added conviction to their dismal outlook for the economy.

Those who opined that the action in the dollar limited Treasury gains refer to the notion that foreign demand for U.S. securities will decline because of diminished returns for foreign investors. Approximately half of the outstanding Treasuries are held by foreign investors.

The other group sees a faltering dollar as indicative of less-than-ideal economic conditions. This leads to the thought that the Fed will be more likely to cut interest rates, a bond market dream.

Whose side are you on? That may not be clear yet. Relationships and conditions of financial markets change, and often require long-held theories to be tweaked in order to fit current circumstances. Keep watching the dollar and see how Treasuries behave to determine whose side you're on. Or just try flipping a coin.

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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 owns U.S. Treasuries and shares of the Fidelity Inflation Protected Bond Fund. She prefers her portfolio shaken, not stirred. The Fool's disclosure policy is never in disguise.