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

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Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Treasury prices declined for the second consecutive week amid signs of a soft economic landing arising from strong retail and manufacturing reports, coupled with tame inflationary data. Bond prices move inversely to yields.

Following the prior week's bond market trouncing, Treasuries rose on Monday, with buyers taking advantage of the dip in prices and positioning themselves before the next day's Fed meeting. On Tuesday, Treasuries gained their most in a week following the Fed's expected announcement that rates would be left unchanged. The Fed's comments, which acknowledged a substantial cooling of the economy and the deterioration of the housing market, gave renewed hopes of future rate cuts. The two-year note yield dropped 4 basis points to 4.62%, and the 10-year yield fell 3 basis points to 4.49%.

Oh, what a difference a day makes. Robust retail sales figures for November, coupled with a rise in mortgages and a poor 10-year note auction, sent prices tumbling on Wednesday. The picture of consumer strength sent yields rising on the two-year notes to 4.70% and on the 10-year notes to 4.58%. Prices slipped a bit more on Thursday, when the New York Fed released its survey showing strong business conditions in December and indicating that jobless claims fell for the second week.

Friday's release of the consumer price index, which showed rates surprisingly unchanged from the prior month, gave rise again to some optimism that a lack of inflationary signs might lead to rate cuts. The 10-year yield dropped below 4.50% at one point before profit-taking set in, sending the yield back up another 10 basis points, close to its opening price.

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

  • Ratings agency Fitch forecast that the performance of certain structured finance bonds backed by subprime mortgages, credit card balances, franchise loans, and small-business loans will suffer next year as consumers feel the brunt of the housing slowdown. Fitch also said that it will probably downgrade 300 mortgage-backed securities collateralized by subprime loans this year, with more to come in 2007.

  • Home Depot (NYSE:HD) announced plans to issue $5 billion of bonds to pay for share repurchases. Standard & Poor's, a division of McGraw-Hill, responded by downgrading the company's credit ratings two levels to A+, while Moody's lowered its outlook for the company to negative.

  • The Treasury sold $8 billion in 10-year notes on Wednesday at a 4.58% yield, a rate much higher than expected.

  • The Mortgage Bankers Association released data showing mortgage applications at their highest level in more than a year.

  • Discrepancies in the valuations of shares of Time Warner Cable held by Adelphia Communications and put into evidence as part of the company's reorganization hearings have prompted Adelphia bondholders to request a revaluation of the company's assets.

Hot tip
Investor 007 has uncovered where some of this country's most prominent economic advisors think our economy is heading next year.

According to a report published last week by members of the Securities Industry and Financial Market Association's Economic Advisory Committee, economic expansion is expected to continue in 2007, but at a slower rate of 2.5%, compared with an estimated 3.3% for this year. Other topics highlighted in their forecast included the following views:

  • Higher inflation will remain a market concern, with energy prices posing the major threat.

  • Lower energy prices may help consumer spending.

  • The average monthly unemployment will edge higher.

  • One rate cut of 25 basis points is expected in late 2007.

  • The yield curve will flatten and become slightly positively sloped over the year.

  • The 10-year yield will rise to 4.6% during the first quarter, to 4.7% by the end of the second quarter, and to 4.8% by the end of the year.

  • The two-year yield will rise to 4.65% during the first quarter, to 4.73% by the end of the second quarter, and to 4.65% by the end of the year.

  • Corporate profits will moderate, with tech showing the strongest growth.

  • Corporate bond credit spreads will widen modestly.

  • Equities will rise, with the S&P 500 expected to hit 1,500 by year's end.

For more details, go here to spy on the full report.

Moody's and Time Warner are Motley Fool Stock Advisor recommendations. Home Depot is a Motley Fool Inside Value pick. You can check out either service free for 30 days.

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.