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















Clues to the market
The broad credit market is influenced by a host of macroeconomic factors. Last week, Treasury prices fell as signs of a future rate cut faded and the government sold $32 billion of securities in its quarterly refunding. For the week, the two-year note yield inched up 3 basis points to 4.70%, while the benchmark 10-year yield increased 3 basis points to 4.67%, and the 30-year yield added 4 basis points to 4.85%. Bond prices move inversely to yields.

Treasuries treaded water on Monday and Tuesday, little changed ahead of the Federal Reserve meeting. On Wednesday, Fed policy-makers left the target federal funds rate unchanged at 5.25%, as expected, and Treasuries fell. While the accompanying policy statement voiced continuing concern that inflation could fail to moderate, traders scaled back expectations for a future rate cut. The inversion of the yield curve widened further, with the two-year yield rising more than 5 basis points to 4.72%, and the 10-year adding 3 points to yield 4.66%.

Thursday brought gains as the trade deficit figure came in higher than expected but resulted in only a 1-basis-point decrease in the yields of each of the two-, 10-, and 30-year Treasuries. On Friday, weak retail sales figures initially boosted prices higher, only to lose ground later when the producer price index came in flat, pushing Treasuries lower.

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

  • The U.S. Treasury conducted the following auctions:

    • It sold $14 billion in three-year notes in the final auction of that maturity on Monday to weak demand at a yield of 4.574%.

    • It sold $13 billion in 10-year notes to strong demand at a yield of 4.612%.

    • It sold $5 billion in 30-year bonds to weak demand at a yield of 4.838%.

  • Moody's raised its corporate family rating of Goodyear Tire & Rubber (NYSE:GT) one notch to "Ba3," citing the company's plan to sell stock and use proceeds to repay debt.

  • Standard & Poor's, a division of McGraw-Hill, announced that it will require additional protection for investors in bonds backed by second mortgages. In a separate action, the rating agency also cut its debt ratings for RiteAid (NYSE:RAD) one notch to "CCC-plus," citing integration and operational concerns, debt burden, and thin cash-flow protection arising from concerns over the company's impending acquisition of Brooks and Eckerd drugstores from Canada's Jean Coutu Group.

  • AIG (NYSE:AIG) sued Tyco (NYSE:TYC) to block the company from repurchasing $6.6 billion of debt as part of its restructuring plan at a price it claims is too low. Tyco has threatened to waive the right of bondholders to approve the plan because more than two-thirds of them have refused to tender their securities.

Corporations issuing debt included the following:

  • Constellation Brands (NYSE:STZ), which sold $700 million in 10-year notes in the private-placement market.

  • Deluxe, which sold $200 million in eight-year senior notes in the private-placement market.

  • Genworth Financial (NYSE:GNW), which sold $600 million in two-year remarketed notes.

  • GMAC, the former financial unit of General Motors, which sold $2 billion of debt in a two-tranche offering of two-year floating and five-year fixed-rate notes.

  • Oracle (NASDAQ:ORCL), which sold $2 billion in floating-rate notes in a two-tranche offering of two- and three-year notes.

  • Public Service Electric and Gas, a subsidiary of Public Service Enterprise Group, which sold $250 million in 30-year first-mortgage bonds.

Hot tip
Investor 007 noted some interesting matters regarding the three- and five-year notes last week.

As mentioned here on Feb. 5, it was widely anticipated that the Treasury would stop issuing three-year notes because of an improvement in the budgetary outlook. So it was not a shocker when the maturity's final sale came last Monday. Most market participants believed the auction would bring strong demand and trade down over time because of a lack of new issuance. Surprise! The auction ended up selling to weak demand -- it attracted only an 18.9% indirect bid from a category of purchasers including foreign central banks, as compared to a 32.3% bid in February.

Farther down the yield curve, the five-year note has provided a few wonders of its own. Bloomberg reported last week that indices compiled by Merrill Lynch show that the five-year has posted its biggest gain in six years and has outperformed longer- and shorter-term Treasuries for the first time since 2003. With concerns of inflation and a softer economy chipping away at both ends of the yield curve, the five-year has carved out a relatively comfortable niche for itself. According to the article, five-year notes have gained 2.2% this year, compared with 1.7% for the two-year and 2% for the benchmark 10-year. If the Fed does start to ease, you can expect the more interest rate-sensitive two-year note to gain more than the five-year.

Tyco is a Motley Fool Inside Value recommendation, and Moody's is a Motley Fool Stock Advisor pick. Give either service a try with a free, 30-day test drive.

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 Motley Fool has a disclosure policy.