In a flight to quality, Treasury bond yields have come in at all-time lows at many points on the maturity spectrum. In December, yields on short term T-bills actually swung to the negative, and right now 10-year Treasuries are yielding around 2.5 percent. A little further down the quality scale, corporate bond prices were crushed last year as investors essentially eschewed all risk in their portfolios. Bargain hunters began coming out of the woodwork in November, though, bringing valuations up from the fire-sale prices we saw most of last year. Despite these trends there are still good deals to be found.

A notion has taken hold that because the credit markets are largely responsible for our current crisis, we can’t see a sustainable recovery in the stock markets until the credit markets turn around. And that makes perfect sense; it’s generally not a good sign when companies tap credit markets to fund day-to-day operations, but historically, debt issuance has played a key role in business expansion. For companies to resume normal business operations, debt markets have to operate smoothly. That makes corporate bonds not only a fixed income play, but also a bet on economic recovery.

Speculation aside, at this stage of the game, income investors need corporate bonds to realize worthwhile yields. In this type of market though, risk mitigation remains a vital component of any investment strategy. Historically speaking, high quality corporate bonds with the AAA-rated seal of approval pose only moderately more risk than sovereign debt; quality corporate bonds can go a long way to improving your portfolio returns in a challenging market.

But not just any bond fund will do. Junk-bond funds will continue to face headwinds. A tough economy shakes out weaker players, and a spike in corporate bankruptcies is likely at the lower end of the credit spectrum.

Average duration, a measure of interest-rate sensitivity, is also a concern. With interest rates at their lowest levels ever, there’s nowhere for them to go but up. And when they start moving, it’s likely to be at a rapid clip.

Fidelity Total Bond (FTBFX) is an excellent way to play a potential recovery in the credit markets without losing your shirt in the bargain.

The bulk of the portfolio is highly rated, with 87 percent of its holdings deemed investment grade. Of that, more than 60 percent of the portfolio earns AAA ratings, with 10 percent of the holdings being US Treasuries. A little more than 2 percent are bonds issued by corporations and foreign governments. From there, a third of its holdings are solid-gold corporate bonds dominated by names such as McDonald’s (NYSE: MCD) and Altria (NYSE: MO), as well as a variety of utilities.

That high quality provides a solid base for the portfolio, generating dependable coupons and tapping into the hot Treasuries market.

About 13 percent of holdings are junk bonds, issued primarily by financials. Those add a bit more than 1.5 percent to the fund’s overall yield of 5.5 percent, one of the most attractive features of the fund. You get exposure to the full spectrum of credit quality without overweighting the riskiest of issues.

Another selling point for the fund is manager Ford O’Neil, who in most years has generated impressive performances for his investors and outperformed his benchmark. The exception was 2007, when O’Neil underperformed the Barclays Capital Aggregate Bond Index by 2.8 percent after a small position in subprime mortgage bonds moved against him.

Since then he’s trimmed the worst offending mortgage issues from the portfolio and moved to minimize credit risk, though he does still hold a large volume of mortgage bonds and pass-throughs backed by Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). For all intents and purposes, those pass-throughs now have the backing of the federal government.

Last year was the fund’s worst year ever, as it gave up a bit more than 5 percent on a total return basis. The fund held a diversified mix of bonds rather than focusing on a single class. But looking at the bigger picture that left it lagging its intermediate-term bond peer group by less than 1 percent.

Going forward, there’s no arguing with the fund’s diversification, which leaves it well positioned to take advantage of any further improvement in the credit markets. It also sports an attractive average duration of 4.4 years. Although there will be some effects from rising interest rates, the fund won’t be crushed like some of its shorter-term brethren.

Out-yielding the average Treasuries-only fund by more than two percent, all these positives stack up to make the fund an excellent core holding for the fixed income portion of any investors’ portfolio.