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 for a third week, as signs of an economic recovery emerged and the likelihood of a future rate cut remained remote. For the week, the two-year note yield gained two basis points to 4.84%; the benchmark 10-year yield increased six basis points to 4.86%; and the 30-year yield added four basis points to 5%. Bond prices move inversely to yields.

With nothing on the economic docket until later in the week, Treasury prices traded slightly higher on Monday following the prior week's sell-off. The situation changed on Tuesday, with the market trading lower when a non-voting Fed official voiced a cautionary tone regarding inflation. The 10-year yield added four basis points, followed by three more on Wednesday, amid continued speculation that hopes for a rate cut were dim.

Losses continued Thursday morning, reflecting the Commerce Department's report that new home sales unexpectedly surged 16% in April, the largest increase in 14 years, and solid durable goods figures. Treasuries later recovered to close little changed. In a shortened session on Friday prior to the holiday weekend, even soft data on existing home sales couldn't rouse the bond market beyond an initial positive response. The 10-year note yield picked up two basis points to yield 4.86%, and the 30-year bond finished the week at 5%.

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

• Yields on commercial mortgage-backed bonds rose due to concerns over lax lending practices.
  
  
• Moody's (NYSE:MCO) said it may raise its ratings for Williams Cos. (NYSE:WMB) in light of the company's plan to sell most of its power trading business to Bear Stearns (NYSE:BSC).
  
  
• Amgen (NASDAQ:AMGN) sold $4 billion of debt in a three-tranche offering consisting of 18-month, 10-year, and 30-year securities.
  
  
• CVS Caremark (NYSE:CVS) sold $5.5 billion of debt in a four-tranche offering consisting of three-year, 10-year, 20-year, and hybrid 55-year securities.

Hot tip
China's recent announcement that it will widen the yuan's trading band has had a limited negative impact on Treasuries so far, but its effects could broaden if the currency is further revalued.

Since July 2003, Chinese currency has traded in a limited band of plus or minus 0.3% against the dollar. The Chinese government has now increased that band to 0.5%. At the same time, it hiked its one-year lending rate by 0.18 of a percentage point to 6.57%, and its one-year deposit rate by 0.27 of a percentage point to 3.06%.

China ranks second after Japan as the second-largest foreign holder of U.S. government debt. An appreciated currency may lead China to reduce its accumulation of dollar-denominated assets. Imported Chinese goods would also become more expensive. Should the currency ever be able to freely float, it's thought that the Treasury curve would steepen, reflecting lowered demand and higher inflation. For now, that likelihood seems remote, as China seems more interested in seeking higher returns from alternative investments, such as its recently announced stake in the upcoming IPO of Blackstone.

Fool contributor S.J. Caplan has been an undercover fixed-income aficionado ever since she served in banking and legal capacities covering debt underwriting and fixed-income derivatives. She owns U.S. Treasuries and shares of the Fidelity Inflation Protected Bond Fund. She prefers her portfolio shaken, not stirred. Moody's is a Stock Advisor pick. The Fool has a disclosure policy.