WHO ever thought investing in a bond-mutual fund could be so much fun? Not just any bond fund, mind you. We’re talking about emerging-markets bond funds, a small group that came out of obscurity to play a front-and-centre part in one of the great economic stories of modern times. They also made some nice money along the way.Since the end of the 1990s, emerging-markets bond funds have outperformed all other types of bond funds, and most stock funds too, as prosperity blossomed in what used to be called the Third World.

These funds buy bonds of governments, banks and industrial enterprises from Brazil, Mexico, India, Indonesia and other nations where growth has been taking hold in earnest. Less than 10 years after the last big crisis of confidence in the emerging economies, in 1998, the market has been transformed.

Back then, most investors bought emerging-markets bonds strictly as a speculative flyer, insisting on yields double or triple what you might get on a US government bond. This month, by one measure, the yield spread between a typical emerging-market bond and Treasuries narrowed to a record low of 1.61 percentage points.

The trip from there to here has been highly rewarding for anyone willing to buy and stick with a fund such as the Fidelity New Markets Income Fund, which began operating in 1993.

From the end of 1999 through the first quarter of 2007, according to my Bloomberg, Fidelity New Markets Income returned 14.1 percent a year. Over the same stretch, the J.P. Morgan Emerging Markets Bond Index Plus, a broad index of emerging bonds, gained 12.8 percent annually.

Both handily beat a popular index of emerging-markets stocks, the MSCI Emerging Markets Stock Index, which was up 9.2 percent a year. They crushed the Standard & Poor’s 500 Index, dominated by large US stocks, which struggled to a 1.2 percent annual advance.

As prelude to this dramatic performance, the 1990s produced a whole series of debt and currency jolts, in Mexico in 1994 and in Asia and Russia a few years later. Today, the news is far different.

“Global prosperity has reduced the need for bailouts like the ones led by the International Monetary Fund in Mexico and Asia in the 1990s,” a Bloomberg News story reported March 2. “IMF lending has shrivelled to $11.6 billion from a peak of $81 billion. A single nation, Turkey, now accounts for about 75 percent of the IMF’s portfolio.”

At the same time, says Milton Ezrati, senior economist at the mutual-fund firm of Lord Abbett & Co., “Emerging-market debt issuers certainly have become more disciplined than in the past. Most of these issuers have accumulated international reserves, and inflation rates have dropped from 15, 20 and 25 percent during the late 1990s to around 5 percent on average recently.”

Alas, for investors putting new money to work this whole story is history now. At yields less than two percentage points above US Treasuries, “it is hard to make a strong case for capital gains in emerging market debt going forward,” Ezrati says.

“But at the same time,” he says, “short of an extreme situation there seems little risk of a huge swing back to the extremely wide spreads of the past. This market is very different today from what it was only five years ago.”

In Ezrati’s estimation, “even today’s relatively narrow spreads look attractive against the historically low yields in high-grade, developed bond markets.”

No question, much of today’s reduced differential reflects changes in economic fundamentals. Some of it, however, may also stem from a reaching-for-yield mentality in the markets, downplaying risk.

“Average yields on emerging-markets bonds are close to historic lows, so it’s difficult to see much upside at this point,” writes analyst Arijit Dutta at the research firm of Morningstar Inc. in a web-site commentary. “We would venture very cautiously in this category.”

Such calculations put emerging bonds in close company with a lot of other financial assets these days. The transformation from upstart outsider to mainstream investment, apparently, is just about complete. What a transformation it has been.

(Chet Currier is a Bloomberg News columnist. The opinions expressed are his own.)