(MONEY Magazine) – Over the past three months of stock market turmoil, investors have rediscovered the benefits of bonds. Fleeing one global crisis after another, they have flocked to ultrasafe Treasuries, pushing up their prices and driving yields (which move in the opposite direction) down to as little as 4.7% on long-term issues, their lowest level in more than 30 years. Although yields have since climbed back to about 5%, Treasuries are no longer such a great deal for someone buying today. But don't despair: High-grade corporate and mortgage bonds, overlooked in the recent rally, still offer excellent value.

Investors have been wary of corporate bonds in recent months because they fear a recession could lead big borrowers to default on their debt. But U.S. companies are in a much stronger financial position today to weather an economic downturn than they were during the last recession eight years ago, says John Lonski, chief economist at Moody's Investors Service. "U.S. corporations are better managed today," he says. "They are employing debt more cautiously." Back then, for example, Moody's downgraded the bonds of four corporations for every one whose bonds it upgraded. Today, by contrast, the firm is upgrading about the same number of firms it's downgrading.

Yet because investors have been favoring Treasuries, high-grade corporate bonds are yielding 0.9 to 1.2 per- centage points more than government bonds, the widest gap in a decade. As recession fears wane next year, the yield spread should snap back to a more normal three-quarters of a point, providing corporate bondholders with capital gains. Two high-return, low-expense corporate bond funds are Vanguard Short-Term Corporate and Vanguard Intermediate-Term Corporate.

Ginnie Maes (bonds that are guaranteed by the Government National Mortgage Association) often lag other high-quality bonds when interest rates decline. That's because falling rates encourage homeowners to refinance their mortgages. And when they do, Ginnie Mae holders get their money back prematurely and may have to reinvest it at lower rates. Partly as a result of those concerns, Ginnie Maes are yielding two percentage points more than Treasuries, up from around one percentage point three months ago. But that spread makes Ginnie Maes a steal. "The wide yield spread reflects expectations that a third or more of the approximately $350 billion in outstanding mortgages backed by GNMA will be refinanced annually over the next few years," says Randy Merk, head of fixed-income investment at American Century Investments. "But if mortgage rates remain at their current level of around 7%, only about 10% of those mortgages are likely to be refinanced annually." Even if mortgage rates drop to 5.5%, Merk believes Ginnie Mae funds should still provide total returns of 5% to 10% over the next year. Two no-load Ginnie Mae funds that consistently beat their peers, Fund Watch continued partly because of minuscule expenses: Fidelity Spartan Ginnie Mae and USAA GNMA.

If you prefer a fund that holds a variety of high-quality bonds, consider the no-load TIAA-CREF Bond Plus. The fund largely mimics the makeup of the Lehman Bros. aggregate bond index (the standard benchmark of the bond market), but portfolio manager Elizabeth Black says her goal is to beat the index by scouting for bargains. Helped by a meager 0.14% expense ratio, the fund returned 12.1% over the past year vs. 11.5% for the index. Although Bond Plus is barely a year old, "It has success in its genes," says Morningstar analyst Alice Lowenstein. Black also runs a top-performing eight-year-old bond annuity portfolio for the fund's sponsor, the Teachers Insurance and Annuity Association-College Retirement Equities Fund.

Finally, as we have reported in recent months, municipal bonds offer attractive yields right now, especially for taxpayers in high brackets. For maximum diversification, look for a national muni bond fund like Vanguard Intermediate-Term Tax-Exempt. If you live in a state with high income taxes, you can avoid local levies with a fund that buys only munis issued in your state.

--SUSAN SCHERREIK