(FORTUNE Magazine) – Latin America has always been a tricky place to invest, but it's rarely been as scary as it is today. Stock markets in the region's three largest countries--Brazil, Mexico, and Argentina--have been whacked with staggering losses since the Asian crisis struck last fall and the Russian ruble melted this summer. Few investors have the stomach these days to start shopping for Latin equities, even if they are a bargain. But there is a way to play the exciting new class of Latin American blue chips, like Telefonica de Argentina, Cemex of Mexico, and Brazilian steelmaker CSN, without taking on stock market risk.

During the past decade, Latin companies have issued more than $100 billion in debt, most acquired by U.S. money managers and virtually all denominated in dollars. These bonds have proved far less volatile than equities, allowing investors to sidestep some of the contagion that has punished Latin American stocks (see chart). Over the past three years the bonds have outperformed Mexico's and Argentina's stock markets, according to J.P. Morgan. Moreover, they now sport sky-high risk premiums, which equate to enriched yields. Vince Lathbury, a high-yield bond fund manager at Merrill Lynch, says an investment-grade Latin issue typically posts a payout that is three to four percentage points higher than a comparably ranked U.S. bond. "These bonds represent a happy medium between emerging-market equities and U.S. treasuries," says Scott McKee, a senior fixed-income analyst with J.P. Morgan.

Of course, the bonds have not been immune to the recent market turmoil. In general, prices are down and yields are way up. Leigh Talbot, a fixed-income analyst with BankBoston, cautions that a currency devaluation remains the largest threat to these bonds, though she doesn't think one is imminent. Such a hit could make it difficult for some companies to meet their dollar-denominated loan burdens, straining their ability to adequately service their bonds and raising the specter of default. Still, a currency devaluation would not undermine the value of the coupon because the bonds are not denominated in Mexican pesos or Brazilian reais.

Essentially, buying these bonds is a bet that Latin America will survive the current crisis without an economic downturn, providing rewards to steely-nerved investors. But even with the necessary nerve, it's critical that investors pick strong, investment-grade companies that have withstood past market shocks.

One of the most promising is Telefonica de Argentina, the largest local phone company in the country. The firm, now controlled by Spain's Telefonica, earned $474 million on nearly $3 billion in sales, a 23% rise in profitability from 1996, thanks to enormous demand for telecom service in the region. Lathbury, who has doubled his funds' exposure to Latin corporate debt in the past six months, recently bought bonds issued by Telefonica that are due in 2004 and offer a yield eight percentage points higher than U.S. Treasuries and 6.45 points higher than a comparably rated U.S. firm like United Airlines.

Mexico's Cemex--the world's third-largest cement producer--is also exciting Wall Street. Although Cemex is highly leveraged, with $3.7 billion in long-term debt coming due in the next five years, analysts like the way CEO Lorenzo Zambrano has captured big chunks of high-growth construction markets in Spain and Venezuela. While many Mexican companies reported steep drops in earnings in the first half of the year, Cemex's profits grew 13%. In May the company issued $295 million in debt, due in 2006 and yielding 9.42 percentage points more than U.S. Treasuries and 5.74 points more than U.S. corporate bonds of equivalent quality.

Latin America's largest steelmaker, CSN, is a promising powerhouse, poised to capitalize on rising demand for development in the region. It posted robust profit growth and recently took advantage of Brazil's privatization program to acquire a stake in CRVD, the giant iron-ore producer. In June, CSN came out with a $600 million offering due in 2007, yielding 12.81 points over Treasuries and 8.73 points over a comparable U.S. firm's.

Even if the markets settle, Latin America will be a perilous place to invest as reformers struggle to enact the free-market changes of recent years. Indeed, the rapid growth of the Latin bond market is a direct result of those changes. Yet if this new class of security performs as many analysts predict, investors could look back at this as one of the great bond-buying opportunities.

--Edward A. Robinson