Investor 007's Bond Dossier

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.

Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Last week, Treasuries rallied for three straight days thanks to good cheer over benign inflationary signs before advancing equities curbed their ascent. For the week, the two-year note yield dropped 11 basis points to 4.64%, while the benchmark 10-year yield declined nine basis points to 4.67%, and the 30-year yield fell eight basis points to 4.85%. Bond prices move inversely to yields.

Treasuries began the week heading higher on Monday, with the 10-year yield falling three basis points to 4.73%, thanks largely to technical buying. The consumer price index data fueled a rally on Tuesday. With the report revealing that inflation had risen less than half the forecast amount, hopes emerged once again for a rate cut later this year. The 10-year yield dropped five basis points to 4.68%, while the two-year yield toppled seven basis points to 4.67%. The party continued on Wednesday in a day void of major economic reports. Yields on the 10-year dropped back another three basis points to 4.65%.

While equities continued to chug higher on Thursday, Treasuries declined for the first time in the week. The stock market's rise made some question the possibility of rate cuts, and the 10-year yield advanced to 4.678%. The record-setting stock market and a dearth of economic data kept Treasuries restrained on Friday, with little price movement.

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

• The U.S. Treasury announced that net international demand for U.S. bonds increased 5.5% in February to $45.4 billion.

• Calpine announced a preliminary settlement with a committee of bondholders to eliminate certain duplicate claims filed in its bankruptcy proceedings.

• CSX (NYSE:CSX) sold $1 billion of bonds in a two-tranche offering.

• Wachovia (NYSE:WB) sold $1.5 billion five-year floating rate notes.

Hot tip
Caveat emptor, bond investor.

The subprime debacle highlights that adage. At least 40 subprime lenders have filed for bankruptcy or sought buyers since the beginning of 2006. The spotlight is now on reining in the predatory lending practices that gave rise to the overextension of credit to folks with poor credit histories.

Once mortgage loans are extended, the mortgage lenders typically sell the loans to Wall Street banks, which bundle them up into securities for sale to the public. In that way, the lending banks make money, as do the Wall Street houses, which also lay off risk on investors. Top lawmakers from both sides of the aisle, as well as the chairman of the FDIC, have recently voiced their opinions that investors in such mortgage bonds should be liable for any losses. By holding investors' feet to the fire, that could make it harder and more expensive for banks to sell such risky underlying mortgages.

Whether or not you agree with that idea regarding the subprime sector, in the absence of discernible fraud or misrepresentation, it shouldn't be much to demand that investors be responsible for investments gone awry. Every investor should bear those words, caveat emptor, in mind when looking into any security purchase and understand that with potential reward comes risk.

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 has a disclosure policy.