(FORTUNE Magazine) – A cruel spring it has been for bondholders. No sooner had they finished counting their hefty profits from 1986 -- with total returns exceeding 20% in many instances -- than a quick April sell-off showered down losses. The dollar's sharp drop against the Japanese yen started it all by fanning inflation fears. Then the first wave of bond selling quickly begat more as fixed-income mutual funds, swamped with calls from investors wanting out, were forced to unload bonds at distress prices. Across the board, prices nose- dived. Now for the good news. To those still willing to consider fixed-income investments, the sunken prices mean the reappearance of high interest-rate yields that only recently had seemed to pass into history. Stormy seas still lash the financial markets (see The Economy), but analysts say the sell-off has strewn the beaches with bargains. For some issues the price declines were even steeper than the widely publicized declines in U.S. Treasury bonds. Among the cheapest now are bonds that Wall Street firms dumped in a rush, including municipals and mortgage-backed securities. Since these trade in thinner markets than Treasuries, the selling pressure pounded prices harder. Though prices have recovered slightly, good buys still abound. Among the bonds most roughed up in April were Ginnie Maes -- securities consisting of a bundle of home mortgages backed by the Government National Mortgage Association. Several brokerage houses held unusually high inventories of these securities when the market suddenly turned down. As losses on these inventories mounted, the firms decided to unload at any price they could get. But the pros think it's time to move back into Ginnie Maes. James Kochan, senior bond market analyst at Merrill Lynch, has been ogling Ginnie Maes with 9% coupons, which yield 9.8% at their recent price. He prefers these over Ginnie Maes with coupons of 10% or more because those, he says, are in danger of being prepaid early by homeowners looking to refinance their mortgages at lower rates. He's even advising owners of lower-quality medium-term electric utility bonds, which currently yield 9.5% on average, to dump them for the mortgage-backed securities. Says Kochan: ''By trading up to Ginnie Mae 9s, investors can go from a low-rated Baa security to one that is triple A, and raise their yield to boot.'' Municipal bonds were cheap even before the market melee of recent weeks, but that didn't keep the tax-exempt sector from being hit especially hard by the sell-off in bonds. That's because two groups of sellers -- one driven by market fears, the other by the need for cash to pay April tax bills -- converged in a municipal market already glutted with new issues and sent prices skidding. Robert Dow, chief bond strategist with Lord Abbett, a New York money management firm, thinks the bonds now make sense even for tax- exempt institutions that get no special advantage from munis. The best buys, Dow says, are the longest-maturity municipals. Usually the most volatile in market swings, these took the heaviest beating. One rare jewel is the New York State Power Authority 5 1/2% bond due 2010. The bond is noncallable and prior to the market debacle was priced to yield 6 1/2%, a percentage point less than taxable long-term Treasuries. Now, because the bond's price fell further than Treasuries, its yield is up to 8% -- almost as much as Treasuries. Richard Moynihan, who runs Dreyfus Corp.'s two tax-exempt bond funds, which total $13 billion, likes the New Jersey Building Authority 7.2s of 2013. Rated AA by Standard & Poor's, they recently yielded 8.3% at their sunken price. He also likes the California Public Works Board 6 5/8% bonds due 2009, recently yielding 8%. In corporate bonds, top-grade issues held up best in the April panic. The best place to shop, says James Drury, a corporate bond specialist at Prudential-Bache Securities, is among bonds at the lower end of the investment-grade spectrum, which suffered more. Convertible bonds offer few spring bargains. ''Convertibles were expensive before the market tanked, and they're still expensive,'' says Christopher Lewis, who manages $420 million in convertible bond funds at New York-based Mackay Shields. Lewis attributes the stubbornly high prices of convertibles to continued optimism about the stock market. Yields on convertibles are currently averaging less than 7%, and conversion premiums -- the percentage by which the bond's price exceeds that of the underlying stock -- are above 25%. By Lewis's criteria, a convertible looks like a buy only when its yield approaches 8% and it has a conversion premium well below 25%. For cautious souls who want nothing to do with long-term bonds right now, there is a rewarding place to wait until the clouds clear. James Kochan at Merrill Lynch notes that two-year Treasury notes now yield more than 7%, only a percentage point or so less than 30-year Treasuries. That's an uncommonly narrow difference.

CHART: NOT AVAILABLE CREDIT: ILLUSTRATIONS BY ANDERS WENNGREN CAPTION: Navigating Troubled Waters Though the bond market has become more treacherous lately, it has also tossed yields to the highest levels in many months. DESCRIPTION: Monthly yields for 30-year Treasuries and long-term municipals compared with money funds for 1985-1987. Color illustration: drawing tools on chart.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: STATE OF THE MARKETS DESCRIPTION: Dow Jones average, S&P 500 price-earnings multiple; price of gold, 1982-April 29, 1987.