(FORTUNE Magazine) – WHERE, oh, where, have the bond yields gone? Three-month Treasury bills pay only 5.09%, and even 30-year T-bonds now deliver less than 8%. Heck, two-year notes were recently priced to yield about 6%, the lowest in 15 years. Is there anywhere to go for spicier returns? Hardly, for the alternatives are even worse: Money funds pay a paltry 5.18%, and the average stock dividend yield -- about 3% -- looks downright parsimonious. As a result, the bond market is like Filene's Basement after a sale, where everyone is ransacking the shelves for overlooked bargains. What should you do? With the economy beginning to recover, however haltingly, it would be unwise to extend your maturities. Long bond prices could easily fall as business picks up. Instead, says Robert Manning, head of fixed-income investments at Axe-Houghton Management, an investment advisory firm, ''now is the time to really go for a diversified bond portfolio, and not make any strong bets on rates.''

Treasuries, no matter what the yield, will still be smart buys for at least a portion of your holdings. In particular, individuals should concentrate on intermediate maturities of three to seven years. Five-year Treasury notes recently yielded 7%. If that rate holds steady, over the next 12 months you'll at least beat the inflation rate -- 5% or so -- expected by FORTUNE. And you won't face the redemption problem that nags other bondholders in a time of falling rates. Says Ian MacKinnon, fixed-income chief at the Vanguard Group of mutual funds: ''Treasuries are impervious to calls. With rates this low, that is becoming increasingly important.'' The risk of losing a high yield is one drawback to another top-drawer government obligation: mortgage-backed securities, such as those issued by the ! Government National Mortgage Association (Ginnie Mae). When interest rates fall, many homeowners refinance their mortgages, and Ginnie Mae holders may get back their principal at a most inappropriate time. Investment-grade corporate bonds pay more than Treasuries, but the extra yield is stingy when weighed against the extra risk. Nevertheless, a smart bet for yield might be a corporate bond portfolio stirred together with some Ginnie Maes unlikely to be prepaid, Treasuries, and a few exotica like securities backed by credit card receivables. The Scudder Short Term Bond Fund offers such a stew, 70% of which is rated double-A or higher, with an 8.8% yield.

Junk bonds, which staged a comeback early this year, are probably fairly priced. Says Margaret Eagle, portfolio manager of Fidelity's Plymouth High Yield Fund: ''I'm still sanguine about the market, but I don't think we will see anything like the first-quarter movement in the near term. Would you be satisfied just earning your coupon? At 12% you might.'' That's the yield of Eagle's portfolio, which leads FORTUNE's list of junk bond funds (see page 93). The two best plays in the next 12 months, says Peter Hegel, chief investment strategist at Van Kampen Merritt, a mutual fund company, will be municipals and foreign bonds. Says he: ''Continuing tax increases at the state and local level will make tax-free munis even more attractive to investors.'' Foreign bonds are attractive because many overseas securities still sport high yields. Some managers, like Manning of Axe-Houghton, pick up extra yield and avoid losses from currency depreciation by buying Yankee bonds, which are foreign issues denominated in U.S. dollars. Two of his recent purchases, both double-A rated, sell just over par: British Columbia Hydro 8.625% bonds due 2006 and Canadian National Railways 8.375% due 2002.

CHART: NOT AVAILABLE CREDIT: LINDA ECKSTEIN FOR FORTUNE SOURCES: DONOGHUE'S MONEY FUND REPORT; BOND BUYER; FIRST BOSTON CAPTION: BOND YIELDS GOOD INTEREST RATES ARE GETTING MIGHTY HARD TO FIND It's been a year of shrinking yields, with money funds leading the way. Because their yields have fallen less than those of 30-year Treasuries, municipals are a good buy.