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, bonds gained following Fed chief Ben Bernanke's semiannual testimony to Congress. Investors, fearing the worst, were heartened by a less hawkish stance, and believed the Fed to be on hold regarding any interest rate changes. For the week, bonds registered their largest weekly gain since December, and the benchmark 10-year yield dropped 10 basis points to 4.69%, while the 30-year bond yield fell eight basis points to 4.79%. Bond prices move inversely to yields.

Treasuries slipped in quiet action on both Monday and Tuesday, as the market continued to digest the supply from the prior week's refunding and to speculate over Bernanke's upcoming testimony.

Just in time for Valentine's Day, Treasuries rallied on Wednesday, finding a dovish tone in Bernanke's testimony. By acknowledging diminishing inflationary pressures and giving a restrained assessment of economic growth, the Fed chief's comments pushed 10-year yields down to 4.73%, the largest drop since the end of September. The rally continued on Thursday, following reports showing a surprising drop in industrial production, weakness in Philadelphia regional manufacturing, and a rise in initial jobless claims. The 10-year yield shed another three basis points, to its lowest rate in a month.

On Friday, Treasuries rose again, pushed higher by a drop in new housing construction and weak consumer sentiment figures. The 10-year yield shed another two basis points in a shortened trading session ahead of the Presidents Day holiday.

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

• Univision (NYSE:UVN) is trying to market the largest covenant-lite loan ever, a $7 billion loan to fund its leveraged buyout, void of limits on debt to cash flow ratios or minimum cash flow requirements.

• Standard & Poor's, a division of McGraw-Hill, announced it will consider issuing downgrade warnings of mortgage-backed securities ahead of actual foreclosures, by looking to the amount of delinquent loans and those in foreclosure proceedings or already backed by seized property.

• Costco (NASDAQ:COST) and Rite Aid (NYSE:RAD) were among the companies issuing $15.8 billion in debt and taking advantage of lower borrowing costs.

Hot tip
Investor 007 always is attracted to foreign intrigue. Now, the Federal Reserve Bank of New York has verified that clues to foreign activity can indeed be found in U.S. Treasury auction data.

According to the New York Fed in a recently published study, data gleaned from U.S. Treasury note sales is a good indication of the strength of foreign buying. Many may find this conclusion not so surprising. Foreign purchasers account for approximately 46% of the group of "indirect bidders" for Treasuries, and are often seen as a measure of foreign central bank interest. Some previous skepticism about indirect bidders being viewed as an accurate proxy for foreign demand arises from the fact that this class also comprises domestic and foreign funds.

The study confirms the indirect bid as a proxy for international purchases, although it notes that the data did not distinguish between foreign central bank purchases and those of other international investors. The report also states that the indirect bid proxy is more valid with respect to notes rather than bills, because of differences relating to shorter-term securities attributable more to variation in fund purchases than to foreign investor buying.

If you follow accounts of each auction, you'll find that the Treasury publishes a breakdown of the bidders, including indirect bidders and primary dealers, almost immediately following the sale. Active traders scrutinize this data to glean any tip-offs to a changing demand for Treasuries, which can affect bond prices as well as the dollar. Now, you can do the same, while knowing that the Fed has verified the legitimacy of this exercise.

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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 Group. She prefers her portfolio shaken, not stirred. The Fool's disclosure policy has foiled dozens of evil plots.