"Mortgage rates have fallen significantly in recent months as investors anticipated the Federal Reserve's direct purchases of MBS, which are now occurring.

"But these securities are still attractive because they carry implicit U.S. government guarantees and yields that are much higher than those available from Treasury issues. Our favorite selection here remains Vanguard GNMA (VFIIX).

"This mutual fund has been among the few winners in the investment world as it continues to stick with only government MBS while avoiding interest-rate bets. Current yield is 4.7%.

"We also recommend high-quality corporate bonds. For most income investors, issues from corporations ranked A or higher for credit safety are the next step up in yield and down in quality after Treasury and government MBS issues.

"Yields on individual bonds generally still exceed 6%.The weak economy will continue to put financial pressure on corporate America.

"But that burden should start to ease as the impact of the government's economic-stimulus program is felt and the credit markets loosen. Moreover, the financially strong companies will survive and gain market share.

"Our longtime winning recommendation here is PIMCO Total Return (PTTDX). This fund currently is invested in both MBS and high-quality corporates. The current yield is 4.8 %.

"As credit conditions gradually improve and investors start to take a little more risk, we expect the fund managers to shift the portfolio markedly to corporates.

"We also recommend high-quality municipal bonds. Prices here have been hurt not only by general credit conditions and investors' forced asset liquidation, but also by the significant deterioration in the financial condition of states and localities.

"On the other hand, tax-exempt yields are now exceptionally high, even before their tax exemption. And there's speculation the federal government will have to step in here too and provide funds to the states. Maybe, maybe not.

"In any event, municipal bonds are one of the top-performing asset classes so far in 2009 as we go to press.

"If you buy municipals through just one investment, it should be a national fund that invests in many states because you need broader-than-usual diversification now. We like Vanguard Intermediate-Term Tax Exempt (VWITX).

"It's diversified both geographically and by type of bond. The key factor here is quality, with 95% of the portfolio rated A or higher. The current yield is 4.1%, equal to 5.7% in the 28% federal tax bracket and even higher if you have more taxable income."

Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.