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 remained range-bound amid rising blue chips and mixed economic readings. For the week, the two-year note yield inched up one basis point to 4.65%, while the benchmark 10-year yield and the 30-year yield each tacked on three basis points to 4.70% and 4.88%, respectively. Bond prices move inversely to yields.

Treasuries rose slightly on Monday in thin volume in a day void of economic reports. Various factors including a rally in European government bonds, renewed focus on subprime troubles, and upcoming government auctions helped lift prices and push the benchmark 10-year note yield down three basis points to 4.64%. Prices rose again on Tuesday, and the yield on the 10-year note reached a three-week low of 4.62% following a report of a steep drop in home sales and weak consumer sentiment.

On Wednesday, prices fell against strength in durable goods orders, rallying equities, strong supply, and plain ol' profit-taking. The 10-year yield rose three basis points to 4.65%. Treasuries slipped again on Thursday as equities continued to gain, and the 10-year yield rose to 4.69%. Despite initially jumping following data showing slower than expected first-quarter economic growth and rising inflation, Treasuries finished flat on Friday.

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

• The U.S. Treasury sold $8 billion in five-year TIPS on Tuesday at an expected yield of 2.114%, $18 billion in two-year notes on Wednesday at an expected yield of 4.606%, and $13 billion in five-year notes on Thursday at a slightly lower than expected yield of 4.579%.
• Credit Suisse (NYSE:CS) was sued by Bankers Life Insurance regarding investment-grade bonds it sold which were backed by subprime mortgages.
• Moody's (NYSE:MCO) raised its forecast regarding losses on securitized subprime loans made in 2006, citing home prices, interest rates, unemployment, and reduced refinancing options. The ratings agency also said separately that it may require additional credit enhancements in order to offer increased protection for bondholders, such as limiting the number of underlying bonds which can be modified.
• NYSE Euronext (NYSE:NYX) launched a new online bond trading platform based on its electronic equity market system.
• Corporate debt issues included the following: Estee Lauder (NYSE:EL) sold $600 million notes in a two-tranche offering, including $300 million 10-year notes at 5.55% and $300 million 30-year notes at 6%; and Kimco Realty Trust (NYSE:KIM) sold $300 million 10-year senior notes at 5.70%.

Hot tip
The party's over for bonds -- just ask your 5-year-old.

As reported on Bloomberg recently, technical traders such as John Kosar of Asbury Research say that 30-year Treasury futures indicate that the 22-year, 11-month rally which began in May 1984, ended on April 6. According to Kosar, "The turning point was so obvious that even "a 5-year-old who has a ruler and a pencil can draw a line under the lows and make a determination" that yields have bottomed.

He's not the only one to believe that yields will rise. Others look to macroeconomic data to come to similar conclusions. Such luminaries as Bill Gross, the chief investment officer of PIMCO, and Pete Peterson, the chairman of Blackstone Group, have also opined that yields are due to rise in coming decades in order to attract foreign investment required to finance budget and trade deficits. 

Take out your own handy ruler and see whether you agree. If so, you may want to reallocate your portfolio to adjust for higher yields, but run any thoughts by your savvy kindergartener first.

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 NYSE Euronext. She prefers her portfolio shaken, not stirred. The Motley Fool has a disclosure policy.