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, the bond market slipped while waiting for Friday's release of the November employment report. Once released, hints in the data of a soft landing produced a hard landing for bonds. The market's long-held pessimistic view of the economy and its working assumption that rates would be cut in March was put in doubt, and yields registered their biggest weekly increases in six months. Bond prices move inversely to yields.

The prior week's rally halted on Monday as Treasury prices remained little changed. Prices declined on Tuesday in light of a report showing growth in the services sector. The yield on the 10-year note pushed up two basis points to 4.44%. Following a private November jobs forecast indicating strength, bonds declined again on Wednesday, with two-year yields rising seven basis points to 4.58%; the 10-year picked up four basis points to yield 4.48%.

On Thursday, Treasuries moved down slightly while investors took profits ahead of Friday's employment data. When the report was released the next day, revealing a stronger-than-expected labor market, prices continued to drop and slide following positive comments by Treasury Secretary Paulson about the state of the economy. The two-year note yield increased nine basis points and the 10-year yield added on seven basis points.

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

  • Ratings agencies Moody's and Standard & Poor's, a division of McGraw-Hill, are scrutinizing the ratings of Pfizer (NYSE:PFE) following the failure of a promising drug in the company's pipeline. S&P lowered its outlook on the company's $5.6 million long-term debt to negative.
  • Ford (NYSE:F) revved up the size of its 30-year convertible bond offering by 50% to $4.5 billion, the largest such offering ever.

Hot tip
Hedge funds have boomed in recent years, attracting investor interest with dreams of high returns. That can happen, but debacles can happen, too. Now you may even have the opportunity to forgo the potential upside of an equity investment in a hedge fund, and become a creditor instead.

Citadel Investment Group, founded in 1990 and holding $9.5 billion in assets, made news last week when it began selling $500 million in five-year notes through Goldman Sachs (NYSE:GS) and Lehman Brothers (NYSE:LEH) in a Rule 144A offering restricted to "qualified investors." The notes are part of a $2 billion unsecured medium-term note program, allowing for issuance from time to time without having to go through a full registration process each time. The Chicago-based firm sees them as a way of accessing steady cash while avoiding the margin requirements imposed by institutional lenders. S&P and Fitch awarded the debt ratings of BBB and BBB+, respectively, the first public debt ratings for a hedge fund.

If you view this news as a sign that hedge funds are maturing, beware: Some rumors have circulated that the fund has experienced significant losses in its energy portfolio and needs cash. Citadel has denied these rumors, and the offering document undoubtedly discloses performance information and risk factors. With incoming cash flows from the new debt issuance, Citadel will likely be able to withstand any downturn to a greater extent than if it were left to contend with margin requirements. That's good for the hedge fund, but what's so great for the investor? Investor 007 likes to get a peek at the secretive world of hedge funds, but has no interest in becoming a creditor to an unregulated highflier.

Moody's is a Motley Fool Stock Advisor pick. You can take a 30-day free trial of the Fool's flagship newsletter to find out why. Pfizer is an Inside Value selection.

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 drives some really fancy cars.