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, Treasury prices fell as the likelihood of a future rate cut remained remote and the stock market rallied. For the week, the two-year note yield gained 12 basis points to 4.81%, while the benchmark 10-year yield increased 13 basis points to 4.80%, and the 30-year yield added 11 basis points to 4.96%. Bond prices move inversely to yields.

Treasuries opened the week by moving lower on continued speculation that any forthcoming Fed rate cuts would wait until next year. On Monday, the two-year yield increased three basis points to 4.72% while traders awaited inflation data coming the next day. Although Tuesday's consumer price report proved friendly, prices still slipped following a sell-off in European bond markets. On Wednesday, Treasuries lost early strength and closed nearly flat after better-than-expected industrial-production and housing-starts figures.

An unexpected decline in initial jobless claims and accelerated manufacturing activity in the Philadelphia region sank Treasuries on Thursday. The two-year note yield rose 5 basis points to 4.81%, its highest since late February, while the 10-year note yield added 4 basis points to 4.80%, the highest in more than a month. Following improved consumer sentiment data, Treasuries fell further on Friday, with the 10-year yield rising another 4 basis points.

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

• Standard & Poor's, a division of McGraw-Hill (NYSE:MHP), lowered its ratings on Bausch & Lomb (NYSE:BOL) to junk status, and Moody's (NYSE:MCO) put the company on review for further downgrade in light of its announced buyout and increased leverage. S&P also placed the rating of DaimlerChrysler (NYSE:DCX) on "positive" watch, indicating that it's more likely the rating will be raised rather than lowered.
  
  
• Bear Stearns (NYSE:BSC) sold $21.5 billion three-year notes.
  
  
• Fannie Mae (NYSE:FNM) sold $3 billion five-year notes and $1 billion 10-year reopened notes.
  
  
• Ford Motor Credit, the financing unit of Ford (NYSE:F), sold $1.5 billion five-year notes.
  
  
• Dynegy (NYSE:DYN) sold $1.65 billion of debt in a two-tranche offering of eight-year notes and 12-year bonds.
  
  
• Pepsico (NYSE:PEP) sold $1 billion five-year notes.
  
  
• Rite Aid (NYSE:RAD) sold $1.22 billion in a two-tranche offering of eight- and 10-year notes.
  
  
• U.S. Steel (NYSE:X) sold $1.1 billion in a three-tranche offering of six and 10-year notes, and 30-year bonds.              

Hot tip
Investor 007 had better get some new hot gizmo in which to store cash, because U.S. Treasury bills are getting harder to come by.

As tax receipts increase, the Treasury doesn't need to scrounge around as much for cash. That's why three-year note sales were discontinued last week and also why bills have shrunk from 27% of the Treasury market to 21% over the past four years.

Four-week, three-month, and six-month bills are sold weekly. Instead of paying interest semi-annually like Treasury note and bonds, bills are sold at a discount to their value at maturity.

According to Bloomberg, the three-month yield dropped 9 basis points to 4.72% last Wednesday, the lowest rate in more than a year, as traders snapped them up with future reduced sales in mind. With the three-month yield equaling the 10-year yield at 4.80% at the end of the week, it seems like a coveted place to park short-term money.

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.