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 (%)

Two-year

99.28

4.82

Five-year

99.27

4.66

10-year

99.19

4.67

30-year

99.17

4.78


Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Last week, prices rose and bond yields registered a slim fourth consecutive weekly decline, due to a flight to quality from the subprime mortgage sector. For the week, the benchmark 10-year yield dropped two basis points to 4.67%, while the 30-year bond yield eased one basis point to 4.78%. Bond prices move inversely to yields.

Treasuries treaded water on Tuesday after the extended holiday weekend, ahead of the next day's much-awaited consumer price data and monthly auctions.

Prices fell the next two days. On Wednesday, a higher-than-expected increase in the consumer price index and the release of the January FOMC minutes heightened belief in a steady Fed policy, pushing Treasury prices lower. A strong two-year auction lent support to the market, and the 10-year recovered from early losses to see its yield inch up only one basis point to 4.71%. Prices slipped again on Thursday as the market digested both heavy corporate issuance and a lukewarm response to the monthly five-year note auction and corporate issuance, while continuing to mull the implications of the consumer price report.

Concerns over subprime mortgage losses provoked a rally in Treasuries on Friday. The 10-year note fell six basis points to a six-week low of 4.67%.

Detecting developments

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

  • Bill Gross, manager of the Pimco Total Return Fund (PTTAX), the world's largest bond fund, increased the fund's cash position to its highest level in approximately two years.
  • The U.S. Treasury sold $18 billion in two-year notes on Wednesday to strong demand, at a yield of 4.83%, and sold $13 billion in five-year notes on Thursday to weak demand, at a yield of 4.719%.

Corporate activity included the following:

  • Hewlett-Packard (NYSE:HPQ) sold $2 billion in unsecured senior notes in its largest ever non-convertible offering.
  • JPMorgan Chase (NYSE:JPM) sold $3.9 billion of commercial mortgage-backed securities.
  • Univision (NYSE:UVN) marketed a $7 billion term loan with subscriptions due this week in connection with its leveraged buyout, to reported strong interest.

Hot tip
If you really want to take a look at disturbing data on the subprime mortgage industry, just glance at indices of credit-default swaps on subprime mortgage bonds.

Various investment banks and financial-services companies such as Bear Stearns, Deutsche Bank, and Goldman Sachs periodically create indices for default swaps linked to specific bonds. Credit default swaps are a type of derivative that protects a buyer if the underlying security is not repaid, while providing monthly payments to the swap seller.

Last Friday, Bloomberg reported that an index of credit-default swaps on subprime mortgage bonds fell to a record low, reflecting the losses incurred by companies engaged in the industry. Despite a widening gap between prices at which dealers will buy and sell these contracts, investors continue to purchase them, suggesting that they believe the credit quality of the underlying bonds will further decline.

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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 and Goldman Sachs. She prefers her portfolio shaken, not stirred. The Fool's disclosure policy only lives twice.