Maybe there's a way to thrive in the howling wasteland that is the home-loan market. Bonds backed by mortgages look like a buying opportunity, assuming a new spate of defaults doesn't send their prices tumbling again.

Already, these mortgage-backed securities, or MBS, are showing signs that the market thinks the bad times may be ending. At their worst in mid-March, MBS yields were pumped up to 1.89 percentage points more than ultrasafe Treasurys, according to Merrill Lynch research. Lately, that spread has narrowed to 0.97 point. Historically, the gap is only around 0.3.

What this means is that mortgage bonds are still cheap, with many selling below face value -- and that investors, now less scared by them, no longer need large yield premiums as an enticement to buy. "We seem to be headed back to the spreads we used to see," says Tanya Beder, who heads New York financial advisory firm SBCC Group.

MBS, which pool collections of mortgages, got a bad name because some held subprime loans, made to homebuyers with shaky finances. When this widely held paper, collected into other securities called collateralized debt obligations, turned bad, the credit markets seized up.

The good news for investors is that subprime loans are not being packaged into MBS. Even better, the chastened Wall Street firms that packaged this garbage have mostly gotten out of the mortgage-backed business.

These days, MBS are almost entirely the realm of government-sponsored entities: Ginnie Mae, Fannie Mae and Freddie Mac. These so-called agency MBS don't hold subprime loans and can't blow up. If the underlying loans do go bad, the issuers must subsidize them. Agency mortgage bond prices, too, got walloped in the credit crunch -- unjustifiably. Ginnies, Fannies and Freddies are easy to buy through a broker. With yields slightly over 5%, investors get safety and a higher return than Treasurys.

They do have a few downsides. Even ones with maturities of 30 years will be called long before that as homeowners refinance or retire mortgages. And, as with most bonds, MBSs have hefty markups: Buy a $50,000 Ginnie and pay 1% or more -- $500 and up.

A better alternative is leaving the bond-buying to the pros. USAA GNMA fund is up 2.9% this year and Vanguard GNMA is ahead 2.4%, while stocks are in negative territory. Not all portfolios are great: Fidelity Mortgage Securities fund, which dabbled with subprime, has been in the red since 2007. Fidelity says it's "confident the fund is in good hands."

Write to Larry Light at larry.light@wsj.com

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