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 |
99.27 |
4.76 |
|
5-year |
99.22 |
4.65 |
|
10-year |
99.11 |
4.65 |
|
30-year |
95.04 |
4.74 |
Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Last week, the market rallied ahead of Friday's job data and still closed higher for the week, despite losing ground once the numbers were released. Bond prices move inversely to yields.
Following the New Year's holiday, the bond market reopened to light trading on Tuesday in a session that was shortened in honor of President Gerald Ford. Treasuries gained, with the 10-year note dropping two basis points to yield 4.68%.
On Wednesday, Treasuries advanced once the minutes from last month's Fed meeting revealed policymakers acknowledging the possibility of slower growth, while keeping their eyes fixed on the inflationary outlook. Growth in the ISM manufacturing index kept gains in check during the session's choppy trading. The rally continued on Thursday, spurred on by a lower-than-expected report from the services sector and a slip in the pending home sales index. Bonds gained broadly, with the 10-year yield declining to 4.61%.
Prices fell on Friday following a surprisingly strong December job report, which cast the possibility of a rate cut in March into severe doubt. The two-year note yield rose six basis points to 4.76%, and the 10-year note added four basis points to yield 4.65%.
Detecting developments
Investor 007 noted the following occurrences in the bond market last week:
- Bonds of Adelphia rose after a federal bankruptcy judge approved the company's creditor plan, including a provision that would let the market determine the value of Time Warner Cable shares.
- New York Governor Eliot Spitzer announced plans to seek voter approval for a $2 billion bond issuance to fund stem cell research.
- The Internal Revenue Service announced it is examining French bank Societe Generale in connection with its investigation into bid rigging in the muni bond market.
Hot tip
Our calendars mark the passage of time, and our account statements measure the progress of our portfolios. Especially during this time of year, when prognosticators spew forth their visions for the market and talk about how high the Dow may go or how the yield on the 10-year note will fare, it's helpful to note the correct points of reference for your investments.
Obviously, selection of a benchmark entails choosing one whose components match the characteristics of securities in your portfolio. Other factors to consider include the frequency of its calculation, transparency, and availability of data.
When it comes to bonds, a few popular standards come to mind, but many exist, and these may not be the most appropriate ones for you. Many large investment banks such as JPMorgan Chase
- Lehman U.S. Aggregate Index: comprised primarily of governments, mortgage-backed securities, and investment-grade corporates; carries a 4.8-year duration.
- Lehman Long-Term U.S. Treasury Index: comprised of Treasuries with maturities of 10 years or more; carries a 10.4 year duration.
- Lehman U.S. TIPS Index: comprised of Treasury Inflation-Protected Securities; carries a 6.1-year duration.
- Merrill Lynch three-month Treasury Bill Index: comprised of three-month Treasury bills; carries a 0.2-year duration.
- Merrill Lynch One- to Three-Year Treasury Index: comprised of Treasuries maturing in one to three years; carries a 1.7-year duration.
- JPMorgan EMBI Global Index: comprised of emerging-market sovereign debt; carries a 6.7-year duration.
By choosing an appropriate benchmark, one gains the ability to mark the performance of one's investments against an external standard, and judge risk and return parameters accordingly.
Happy investing in 2007!
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. The Fool has an ironclad disclosure policy.
