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 fell and the yield curve turned positive as inflation remained a concern, despite a softened tone from the Fed. For the week, the two-year note yield rose two basis points to 4.60%, the benchmark 10-year yield added six basis points to 4.61%, and the 30-year yield increased 10 basis points to 4.80%. Bond prices move inversely to yields.

Treasury prices opened the week on Monday to the downside, despite a lack of significant economic releases. Instead, stock gains and concerns that the Fed could remain hawkish contributed to a two-basis-point gain in the 10-year yield, to 4.57%. Treasuries rose slightly the next day, following a weak building permit report, and the 10-year yield relinquished those two basis points. Most of the focus remained on the week's Fed meeting.

Treasuries gained on Wednesday, once the Fed announced its decision to leave rates unchanged and released its accompanying policy statement. The previously inverted yield curve flattened for the first time since last August, as the two-year note yield dropped 10 basis points to 4.52%, and the 10-year yield slipped two basis points to 4.54%.

Treasuries fell the following day, spurred by selling in the longer maturities on further reflection regarding the Fed's possible next move. The yield on the inflation-sensitive 30-year bond rose six basis points to 4.78%, its highest level in a month. The 10-year yield picked up five basis points, while the two-year added six. On Friday, despite initial strength arising from Mideast tensions, prices slipped in the face of surprisingly strong data on existing home sales.

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

• Cantor Fitzgerald lost its bid to enforce patent protection for its electronic bond trading platform, following a federal court ruling in its infringement lawsuit against ICAP Plc.
• Moody's announced that at the end of the month, it will publish changes to the methodology it uses to rate bonds backed by second-lien subprime mortgages.
• CBS (NYSE:CBS) issued $700 million worth of 6.75% senior notes, due 2056.
• Hospira (NYSE:HSP) issued $1.425 billion in bonds in a three-tranche offering.
• Vornado (NYSE:VNO) announced a $1.4 billion offering of 2.85% convertible senior notes, due 2007.
• Wells Fargo (NYSE:WFC) issued $2.5 billion extendible notes at a floating rate, its largest sale since 2003.
• Wyeth (NYSE:WYE) issued a $2.5 billion two-tranche offering.

Hot tip
Globalization really can make it seem like we live in a small, small world. The financial markets are no exception.

A recent U.S. Treasury report revealed an upturn in foreign investment in U.S. securities, including bonds. Foreign corporate bond purchases rose $7.4 billion between December and January, and Treasury purchases increased $4.7 billion over the same period.

In terms of regional buying, Japan, China, the U.K., and oil-exporting states led the shopping, while selling arose from the Caribbean. Japan, the largest foreign owner of U.S. debt, now holds $648.8 billion, ahead of second-ranked China's ownership of $353.6 billion. Japan will likely remain the No. 1 holder for some time, despite anticipated selling prior to the end of its fiscal year on March 31.

The effect of foreign holdings of nearly 52% of U.S. marketable debt may influence presidential election politics. Sen. Hillary Clinton has concerns about the high level of foreign debt ownership as a risk for our economy. Treasury Secretary Henry Paulson opposes this view, instead seeing international demand as a sign of confidence in the U.S. economy. While we wait to see how this debate may play itself out in presidential politics, we could now witness continued Japanese selling at this time of year putting a ceiling on higher Treasury prices.

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 and Goldman Sachs. She prefers her portfolio shaken, not stirred. The Fool has a disclosure policy.