(FORTUNE Magazine) – BONDS HAVE FARED better than stocks this year, but that isn't saying much. Total return has generally amounted to only a few percentage points, while prices have behaved like a yo-yo. Early in the year, yields on long-term Treasuries jumped from 8% to 9% on inflation fears, only to sink back toward 8% on signs of a weak economy in May. Then came Iraq's invasion of Kuwait, driving rates up again. What's an investor to do in this kind of market? Go for quality and moderate maturities -- say, five to seven years. Only the safest issues should be in your portfolio. The bond market is still hostage to the Persian Gulf crisis. An outbreak of fighting would probably push interest rates higher, causing bond prices to fall. Typically, when interest rates rise, bonds with intermediate maturities suffer a smaller loss in market value than long-term bonds. Even without a war, other factors are likely to keep yields high. Among them: competition from foreign bonds, whose inflation-adjusted yields have surged above T-bond yields for the first time since the mid-1970s. Here is a review of different sectors of the fixed-income market:

GOVERNMENTS: Mortgage-backed securities, such as those guaranteed by the Government National Mortgage Association (GNMA), sport a higher interest yield than Treasuries of the same maturity, not counting monthly repayments of principal. But the average premium in yields has narrowed sharply from 1.7 percentage points a year ago to just one percentage point today. That is about as low as the spread gets, and it's not enough to compensate for the risk that the mortgages will be prepaid by homeowners if interest rates fall. Your best value: Treasury bonds with maturities of seven years, recently yielding 8.6%.

CORPORATES: Weakening corporate earnings have caused nervous investors to unload many of these bonds, especially those in the junk sector. Don't be fooled into going bottom fishing with a big net. A recent study by the Bond Investors Association, a not-for-profit investor assistance group, concluded that as much as 30% of outstanding junk issues could default by 1993. Nevertheless, a few issues, such as those of Kroger and RJR Nabisco, look relatively safe.

MUNICIPALS: With the yield on tax-exempts running at 84% of those from Treasuries, munis look great. However, stick to the safest bonds -- triple A, general-obligation issues -- and prepare to hold them until they come due. Few munis ever default, but if you sell early you might take a beating in a nervous market. (For more on investing in municipals, see Taxes and Investing.)

FOREIGN BONDS: In a world that is ever more interlocked, it pays to look abroad -- especially now. The 8.5% yield on a five-year U.S. Treasury bond is topped by the roughly 9% available on equivalent maturities in the Netherlands and Germany, about 10% in France, nearly 11% in Canada, and 12% in Britain. Foreign government bonds are hard to buy directly. Better to invest in a top- rated mutual fund, such as Paine Webber Master Global or Van Eck World Income. In the past three years, international bond funds have rung up the best performances (see ''The Best Mutual Funds,'' page 31).

CHART: NOT AVAILABLE CREDIT: SOURCES: DONOGHUE'S MONEY FUND REPORT; BOND BUYER; FIRST BOSTON CAPTION: JUNK IS IN THE DOG HOUSE Junk bond yields have gone out of sight. Other yields, while jumpy, have made no major moves.