As the US gets out of recession and more and more evidence piles in favor of a turnaround in economy, the high yield market can be one of the best performing asset classes in 2002.

The yield spread of the cyclical sectors over the defensives widened dramatically in early 2002, offsetting much of the tightening that occurred late last year. The spreads widened because of the over leveraging in telecom and accounting concerns of Enron and others, like Tyco. See Figure 1, showing the spread of cyclicals above defensive sectors.

Recent concerns over the quality of financial reporting contributed to a re-widening in the corporate quality spread (BBB minus AA yield) back to its secular high of nearly 200 basis points. I would say that a tremendous buying opportunity is at hand for lower rated corporate bonds. Economic recovery has begun and GDP growth has resumed. Almost every economic number coming out is showing gradual improvement. It is only a matter of time that strong earnings growth will be seen in corporate America. As a precursor to that, small and mid cap stocks have been strengthening in the last 6 months. A stealth bull market in stocks has begun. Though the large caps are remaining down, the majority of stocks are going up and foretell the conditions in the wider economy.

Profit margins will see expansions and cash flows will get stronger for many high yield issuers as recovery becomes more self-imminent. See Figure 2 to realize the wide spreads to be taken advantage of.

	Current Yield	3 month	Year to Date	3 Years	5 Years
Vanguard High Yield Corp	9.0%	2.01%	2.08%	1.41%	4.62%
Strong High Yield Bond	11.85	-1.16	0.17	-1.77	3.04
Fidelity High Income	9.90	1.95	1.96	-6.39	1.30

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