(FORTUNE Magazine) – Bond experts are always at odds over the future direction of interest rates, but lately their bickering has reached a heated pitch. Economic growth is slowing, so some insist that interest rates will tumble; yet bond bears growl back that the Federal Reserve's fight against inflation spells higher interest rates. What's an investor to do: plunge now or hold off for higher yields down the road? The answer is simple: Look for bargains that should pay off no matter which way interest rates turn. Of course, a sharp rise in rates will hurt all bonds. But among the vast sea of fixed-income securities are islands of opportunity where the yields are so attractive that even if interest rates nudge up a bit in 1990 (as Fortune's economists expect), investors should still enjoy a hefty return. Not surprisingly, the best bargains are bonds that have come under selling pressure, so their prices are down. Nowhere is the case more compelling than in the junk market. For owners of junk bonds, 1989 wasn't just a bad year, it was a nightmare on Elm Street. Unnerved by some highly publicized defaults among big junk bond issuers, investors exited the market in droves, driving down prices. For the first 11 months of 1989, junk bonds returned less than 2% on average, including income and capital depreciation. Oddly, among the bonds that suffered most in the recent decline were the higher-quality junk issues. Because these were easier to sell than the lowest- quality junk, they were the first to be unloaded when junk bond mutual fund managers had to raise cash to meet redemptions. William Veronda, who runs $250 million of high-yield funds for Financial Programs Group of Denver, notes that many of those better-quality junks are still selling at sharply reduced prices. ''It makes more sense than ever to stick with quality names,'' he says. Veronda especially likes the RJR 13.5% bonds due 2001 and Duracell 13.5% bonds due 2000, both yielding around 12.9%. For most people, mutual funds offer a safer route into the junk bond jungle because they provide diversification. Some junk funds are weighted with higher-quality bonds, including the Financial Bond Shares-High Yield Portfolio and the Vanguard Fixed-Income High-Yield Portfolio. Both are no-load funds. Another rousing buy in the bond market are the mortgage-backed securities known as collateralized mortgage obligations (CMOs). These fixed-income securities consist of mortgages, most of which have been issued and insured by government agencies such as the Government National Mortgage Association (Ginnie Mae). Unlike straight Ginnie Maes, however, which can be suddenly prepaid if interest rates fall, the interest and principal payments on CMOs are fully predictable. Recently CMOs have been yielding up to 1.5 percentage points more than similar-maturity Treasury bonds, an unusually generous spread. One reason for that extra dollop of yield is that ailing thrifts have been dumping large quantities of CMOs to raise cash needed to meet more stringent capital guidelines. Steven Hueglin, executive vice president of Gabriele Hueglin & Cashman, a New York bond house, is recommending many of these issues, including the Ginnie Mae 8.88% CMOs, yielding a fat 9.42%. For taxophobes, news from the muni market is downright heartening. Long-term municipal bonds are yielding 7.25% on average, almost 91% of similar-maturity Treasury bonds, the closest these yields have been in more than two years. For someone in the 28% tax bracket, that muni yield works out to a taxable- equivalent rate of 10%. Municipal prices are soft because insurance companies and banks, usually heavy buyers, have been holding back as their need for sheltered income has declined. Peter Hegel, who oversees $6 billion in bond funds at Van Kampen Merritt, recommends the Long Beach, California, Harbor Revenue bonds due 2019, yielding 7.3%, Florida Board of Education bonds due 2023, yielding 7.3%, and New York State Energy Research and Development bonds due 2024, yielding 7.4%. The Long Beach and New York State bonds are subject to the alternative minimum tax, so check with your accountant before buying. In these uncertain times many investors are loath to give up the safety of Treasury bonds. But even in that market a sharp eye can spot opportunity. Right now the smart money is moving into intermediate-range maturities of, say, five to seven years. Reason: The difference between long- and short-term rates is unusually slight, so an investor can pick up virtually the same yield in an intermediate-maturity bond that he can in a much riskier 30-year bond.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: THE BEST BOND BUYS INCLUDE A BRIDGE The bonds at right are considered exceptional bargains right now. Among analysts' current favorites: the New York Triborough Bridge and Tunnel Authority 6.75% bonds due in 2005, yielding 6.95%.