The question now is whether high-yield bonds are sweetening the yield pot enough to continue to attract investors. Patel thinks that's still the case. "In my mind, today's narrow yield spreads are justified by lower credit risk and an improved economy," she says.

Patel counters concerns of an overheated market with the observation that default rates have decreased dramatically, from a peak of 11% in January 2002, to just below 6% in August of this year. It is also a more diverse marketplace, she adds, with many of the now -defunct, highly speculative media and telecommunications companies that once populated the junk bond market replaced by new issuers representing a variety of industries.

Although she believes default rates should trend "modestly lower" over the next year, a pickup in defaults among issuers in the lower credit tiers could reverse that trend further out. To head off that possibility, she prefers to stick with BB and B names, which represent the better-quality end of the junk bond spectrum. These bonds currently yield 300 to 500 basis points more than Treasuries, compared with yield spreads of 600 basis points or more for lower-quality issues. The possibility of an increase in defaults among lower-quality issuers, she says, justifies what she considers a modest sacrifice in yield.

Convertible Kicker

Pioneer High Yield Fund has traditionally maintained a heavy presence in convertible bonds, which now account for 55% of fund assets. Patel had two-thirds of the fund in convertibles at the beginning of the year, but pared back when they began trading above par, or when the issuer called them. She has put much of that money into some straight high-yield bonds that she believes have more favorable valuations than convertibles right now.

The fund's hefty allocation toward convertibles makes it something of an anomaly among garden-variety junk bond funds that focus mainly on traditional high-yield debt. "While many of the fund's peers dabble in convertible securities, this fund feasts on them," notes Morningstar analyst Scott Berry. "That exposure can cause the fund's short-term returns to diverge dramatically from that of the high-yield category as a whole, and can add to the fund's overall volatility."

Over the long-term, however, the convertible bond position has contributed to the fund's excellent performance, Berry adds. Its performance ranked among the top 3% of high-yield funds in 1999, 2000 and 2001, although it underperformed the group slightly in 2002 when the stock market downturn hit hardest. Over the past year, the fund is up 39.7%, putting it in the top 7% of funds in its Morningstar category over the period.

Patel views convertible bonds as a way to obtain industry exposure beyond what the high-yield bond market offers, because many smaller, rapidly growing technology and health-care companies prefer to issue them over straight high-yield debt. Their equity kicker also serves as a possible source of capital appreciation, particularly if narrowing yield spreads put a damper on the growth potential for straight high-yield bonds.

Patel prefers to buy convertibles that trade at a steep discount and have wide conversion premiums. Because the odds of the bonds being converted to stock are initially low, they trade on bond value and have a more muted response to changes in stock price than bonds with narrower conversion premiums. At the same time, these discounted convertibles respond more closely to changes in the underlying equity than traditional high-yield bonds, yet offer similar yield characteristics. Once the bonds begin to trade above par value, Patel will begin moving out of the position.

A large presence in the technology sector, which represents 30% of assets, has contributed to the fund's strong performance so far this year. At 22% of assets, healthcare represents the second largest sector allocation. Ivax Pharmaceuticals, a recent purchase in that sector, produces generic drugs that should benefit from the increasing use of those products. In the technology area, Patel likes Sanmina Corp., a component and semiconductor manufacturer.

Balancing out the fund's volatile technology and health care holdings is a substantial allocation toward economically sensitive industries such as basic materials and industrial manufacturing. Those areas would be likely beneficiaries if Patel's vision of a sustained economic recovery indeed takes hold.