The rally that began at the start of the year is sputteringas demand and follow-through for new issues begins to wane.

In fact, although confusion clouds the direction of the senior securities at first, when these clouds are parted, one begins to see certain directions unfolding.

The key to the bond markets is no longer in monetary aggregates (the money supply figures of M-1, M-1 plus, M-2, etc.). During the past 10 weeks, these numbers have been up modestly twice, up a sizable amount twice, unchanged once, and down five times. The growth rates for M-1 and M-2 are below the quarterly targets set by the Federal Reserve. However, this has eased any upward pressure on short-term interest rates only to a lesser degree.

The focus now for the direction of the bond markets is on the fate of the U.S. dollar abroad, on the strength of our economy and on the degree of inflation present in that economy.

At this stage of the game, the last three ingredients have worsened, and higher long-term interest rates would seem a good bet.

The economy is now revealing itself to be much stronger in the fourth quarter than anyone had thought. This brings with it the prospect of higher inflation in the United States necessarily followed by a declining dollar abroad. Coupled with an already announced rise in foreign oil prices, this in turn inevitably leads to higher prices on imported goods into the United States, which brings us back to more domestic inflation followed by a continued run on the dollar, etc., etc.

Most economists are pushing back the time for the beginning of an economic downturn, and with it, the peaking of interest rates.

All this in a sense helps explain why long bond buyers want a positive return, i.e., the rate of inflation (8.9 percent in '78 vs. 6.8 percent in '77 as measured by the consumer price index) plus an additional return.

The $150 million triple-A Bell Telephone Co. of Pennsylvania was only one-third sold last week at a 9.37 percent return. The issue traded down to a 9.46 percent level when it was thrown on the open market to trade.

Four billion dollars in municipals purportedly are in the pipeline for the first quarter, with the greater preponderance being in revenue housing bonds. The buyer should not be that eager to purchase housings because the supply will be there probably into the second quarter.

Instead, focus on a good A-rated electrical revenue issues, whose yields will also be rising, but to a lesser extent. Sevven and one-half percent would be a good purchase level for a single-A utility revenue.

Prime quality general obligations should be watched as well. They have been scarce and are still away from their 1974-75 high-yield levels.

The Treasury will sell a two-year note on Tuesday. Subscriptions for as low as $5,000 may be entered free at any Federal Reserve Bank or branch, or at the U.S. Treasury in Washington, D.C. A price guesstimate would be 9.85 to 9.95 percent.

Several brokerage houses are offering a six-month "Unit Investment Trust" composed of domestic certificates of deposit, with a new annualized return of 10.57 percent. These units are available in $1,000 minimums.

I still feel the short-term area is the place to be over the next few months to preserve capital while earning a high return.

For those investors who want to extend now and obtain unusually high yields, Smith Barney, Harris Upham and Co. has published a study, "The 1977-78 Lower-Rated Debt Market" which offers insights into purchasing lower-rated bonds with very high returns.