(FORTUNE Magazine) – If the phrase ''Third World debt'' still sounds like a nasty slur, you may want to update your vocabulary. The stuff that made bankers weep in the 1980s has been a white-hot investment in the past two years: One proxy, the Salomon Brothers Brady Bond index, has risen 79% since inception in March 1990, a 25% annual rate of return. As the finance ministers in such countries as Mexico, Argentina, and Morocco labor to cut inflation, privatize state-run industries, develop capital markets, and build up foreign exchange reserves, economies dismissed as basket cases less than a decade ago are becoming fiscally fit. Yet despite the progress, these countries must still pay steep interest on their bonds: Long- term, dollar-denominated Mexican bonds pay 10.28%, almost three percentage points more than long U.S. Treasury bonds; the dollar-denominated debt of Morocco offers 20.93%. % Betting that retail investors will bite at numbers like that, investment houses recently unleashed a smattering of new funds that package emerging- market bonds for U.S. buyers. In July 1992, Scudder Stevens & Clark launched the closed-end Latin American Dollar Income Fund, an SEC-registered, dollar-denominated bond fund that trades on the Big Board. Then in late October came the Alliance World Dollar Government Fund and Salomon Brothers' Emerging Markets Income Fund, both closed-end vehicles. The same month, G.T. Global jumped in with the first open-ended version, the G.T. Global High Income Fund. By virtue of being first, Scudder's Latin American Dollar Income Fund has earned the most attention from investors. Michael Porter, closed-end fund analyst at Smith Barney, recommends purchase of the Scudder fund, which yields a hefty 10.5%. Porter believes it will also carve out modest capital appreciation, giving investors a total return of 11% to 15% a year. Porter is waiting for the other funds to have a bit of trading history behind them before rendering judgment, but the prospects look good. Says he: ''We like assets in less developed countries because unlike the rest of the world, those countries are on an economic uptrend.'' Before you write that check, remember what Moody's and Standard & Poor's calls this stuff: junk. Except for Chile, no Latin American country merits an investment-grade rating. The good news about investing in such debris is that if the economic progress continues, as most analysts expect, some of the countries will earn that investment-grade seal of approval and their bonds will spike skyward. Lincoln Rathnam, emerging-market analyst at Scudder, expects Mexico and Venezuela to be upgraded within three years. What might block progress? The developed world. If the U.S., Canada, and Europe can't shake their economic doldrums, the export-led booms of Latin American countries could wither. ''They've hung their hats on reasonable economic growth in the world,'' says Rathnam. ''If the global economy gets worse, these countries could face problems meeting their obligations.'' Remember, this is the Nineties: Nobody said that double-digit returns were going to come easy.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: SALOMON BROTHERS CAPTION: BOUNTIFUL BONDS FROM THE DEVELOPING WORLD