Last month, Fed Chairman Ben Bernanke declared that the recession is most likely over. Of course, that proclamation by itself doesn't mean it's time to break out the bubbly. Despite signs of economic and financial stabilization, we're not out of the woodsyet.

Investors need flexibility and liquidity in their portfolios. That means investing in stocks andbonds. So where do you begin to invest in the bond world? What areas offer the best return?

To get some answers, I spoke with some bond experts at Payden & Rygel Investment Management. Here's what they had to say.

What rates will do
Before you invest in bonds, you should have an idea of the direction in which interest rates are likely to move. According to Thomas Higgins, Payden's chief economist, the Fed is starting to phase out some of the unconventional programs it implemented at the height of the financial crisis. That in turn should lead to a tightening of policy.

Higgins believes interest rates will climb higher gradually. "The yield increases will be more steady, measured yield increases," Higgins said on a recent call. "Debt-to-GDP is expected to grow significantly and so rates could rise 120 to 150 basis points starting around the middle of next year. Though there is the risk that the Fed may act preemptively, especially if the strength of the U.S. economy surprises on the upside."

Where to invest in the bond universe now
With that background in mind, let's take a look at Payden's specific recommendations. The investment management company takes a three-pronged approach to bond investing right now, focusing on corporate bonds, municipal bonds, and emerging-markets debt to take advantage of the opportunities in fixed-income securities.

Corporate debt
Jim Sarni, managing principal and senior portfolio manager at Payden, likes both investment-grade bonds and high-yield junk bonds that have ratings below investment grade.

On the investment-grade side, Sarni favors companies in defensive industries. In particular, he notes that Allied Waste , which merged with Republic Services (NYSE: RSG) last year, offers six-to-seven-year bonds with yields above 6%. For those with a shorter time horizon, Sarni likes Dow Chemical (NYSE: DOW), whose three-year bonds offer a yield between 3.5% and 4%.

For those seeking higher yields from riskier bonds, Sarni favors Georgia Pacific , whose seven-year bonds yield 7.5%. He also mentioned long-term bonds of Edison Mission Energy , owned by Edison International (NYSE: EIX), which offer an 11% yield.

In addition, Sarni says Payden owns some bank names such as Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and JPMorgan Chase . "These offer slightly higher yields than other comparable maturity and quality issues due to the obvious concerns about the banking industry today," Sarni said.

Municipal bonds
Sarni expects to see higher income taxes, given the amount of debt the U.S. is undertaking. Municipal bonds can help investors fight the impact of higher taxes, because interest income from munis is generally exempt from tax both at the federal level and within the state in which the bonds are issued.

Although munis have already had a nice run, Sarni says they're still attractive at current valuations: Munis trade with yields around 4.5% to 5%. If the top tax bracket eventually approaches 50%, Sarni says, that would equate to taxable equivalent yields of 9% to 10%, which would provide nice capital appreciation for investors. Continued...