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

Price

Yield

2-year

$99.21

4.67%

5-year

$99.24

4.55%

10-year

$99.27

4.64%

30-year

$99.02

4.81%

Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Last week, the benchmark 10-year Treasury enjoyed its largest gain in more than two months on Monday because of tame inflationary data, before losing some ground midweek and ultimately regaining strength on a soft employment report released on Friday. For the week, the two-year note yield inched up 2 basis points to 4.67%, while the benchmark 10-year yield declined 3 basis points to 4.64%, and the 30-year yield slipped 7 basis points to 4.81%. Bond prices move inversely to yields.

Treasuries charged higher on Monday following reports showing a surprisingly large decline in inflation, as measured by personal consumption data, and a slowdown in business activity. The 10-year note yield fell 8 basis points to 4.62%, its largest daily decline in more than two months.

Treasuries fell the next three days. Unexpected strength in manufacturing growth ended the rally and sent the two-year note yield up 4 basis points to 4.63% and the 10-year up 1 basis point on Tuesday. Traders now questioned the idea of a rate cut later this year, despite data showing that pending home sales fell to a four-year low. Amid an increase in factory orders but a weak private-jobs report reading, both two-year and 10-year notes ended on Wednesday yielding 4.64%. On Thursday, a surprising drop in new unemployment claims and growth in the services sector pushed the two-year yield to 4.69% and the 10-year yield to 4.67%.

Unexpectedly weak labor growth last month propelled Treasuries higher on Friday, and the 10-year yield declined 5 basis points to 4.64%. All eyes will be on the Fed meeting this week, which is expected to leave rates unchanged.

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

  • The U.S. Treasury announced on Monday that it expects to pay down $145 billion of debt in the third quarter of this year, $15 billion more than estimated in January. On Wednesday, the government announced its suspension of three-year note sales following this week's $14 billion auction.
  • Edison Mission Energy, a unit of Edison International (NYSE:EIX), sold $2.7 billion in high-yield securities containing a poison put in a three-tranche offering, the third-largest junk offering this year.
  • IBM (NYSE:IBM) sold $1.25 billion in six-year extendible notes.
  • Qwest Corp., a unit of Qwest Communications (NYSE:Q), sold $500 million in 10-year notes in the private-placement market.
  • Morgan Stanley (NYSE:MS) sold $4.75 billion in floating-rate notes in a four-tranche offering.
  • Procter & Gamble (NYSE:PG) sold $3.4 billion in euro-denominated bonds in a two-tranche offering.
  • Wells Fargo (NYSE:WFC) sold $413 million in Australian-denominated five-year floating rate notes.

Hot tip
According to some big-time bond players, the world is flat.

The most recent quarterly survey of primary dealers conducted by the Securities and Financial Markets Association revealed that interest rates will decline and the yield curve will remain flat to slightly positive over the next two quarters.

Survey participants thought that a Fed rate cut could come along during the next two quarters, depending on data. Upside risks include higher-than-expected inflation or stronger-than-expected economic growth. A continuing housing slide could lead to downside risk provoking an ease in monetary policy. Total Treasury issuance is estimated to be $111.4 billion in the second quarter, lower than the first, because of the influx of tax receipts. A 23% decline in the federal budget deficit to $191 billion for fiscal year 2007 is forecast, reflecting underlying strength in tax revenue growth.

Benchmark yields are forecast to decrease. At the end of the second quarter, the two-year note yield is expected to reach 4.63%, the 10-year yield to slip to 4.63%, and the 30-year bond to yield 4.78%. At the end of the third quarter, the two-year is projected to yield 4.55%, the 10-year 4.60%, and the 30-year 4.73%. With the investor in mind, participants recommended overweighting short-duration sectors and neutrality in longer-duration sectors.

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.