Meet the Street: What's Next for Bonds?

Good news around the corner for the stock market means good news for the bond market, as Prescott B. Crocker, managing director of Evergreen Investment Management, sees it. Crocker, lead manager on the Evergreen High-Yield Bond Fund, which is up 6.29% so far this year, admits that the luster of fixed-income investments, which have done well over the past two years and particularly post-Sept. 11, may be fading.

Prescott B. Crocker, Managing Director, Evergreen Investment Management

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But he still sees pockets of strong investment opportunities in the fixed-income markets, both in the near- and the midterm. Pointing to the tremendous fiscal and monetary stimuli of the past three months, Crocker also likes 10-year Treasuries, now yielding 4.74%. In fact, Crocker predicts the Fed will lower the fed funds rate another 25 basis points, to 1.75%.

And -- fairly confident that the stock market and the economy will finally pick up by early spring (which means that the usual risks associated with junk bonds should decline in tandem) -- Crocker is also putting his money on corporate and high-yield instruments.

TSC: One of your most interesting comments is that the equities markets will finally stage its long-awaited rally roughly around March or April. Why do you believe this, and how will this impact the bond markets?

Crocker: We believe the stock market will rally over the next three months, given the fiscal and monetary stimuli from the government, particularly over the past three months and post-Sept. 11. In fact, I see the fed funds rate going down another 25 basis points to 1.75%. This will boost the equities markets, which, in turn, will impact the bond market because of lower risk.

In fact, we are going to be taking on higher risk in the Evergreen High-Yield Bond Fund, and I would even predict returns of 5% to 7% in the stock market over the next two years, vs. 9.5% returns in high yield over the next two years. For a risk-accepting investor, we believe that high yield provides an opportunity at this time.

For the risk-averse, we would recommend TIPS [Treasury Inflation Protected Securities], which are now returning 3.4% real, guaranteed returns. I think it's generous, especially because it's guaranteed by the U.S. government. ...