Encouraged by the defeat of President Carter, the markets opened Wednesday morning with great expectations. Long Treasuries quickly moved up 3 points, as did corporate bonds. The municipal market also responded with price increases. But within an hour, the "Reagan rally" was dead, and prices fell much faster than they had risen. By day's end, long Treasuries had dropped 5 points from their earlier peaks, for a net loss of 2 points.

The enthusiasm came from expectations and not from reality. Reality pointed to the existence of a high rate of inflation, a growing money supply and a strengthening economy. Republican changes were far away, but the expected changes of the Fed for a tighter monetary policy were imminent.

In the same vein, it is becoming clear that the Federal Reserve is now in control of fighting inflation and giving direction to the economy. The Fed will be in the driver's seat between now and Inauguration Day. And it is fully expected that it will tighten credit to slow the economy in hopes of curtailing inflation. This specifically means higher short rates.

There is another side to this rudderless market, and that is its volatility. Any market that can see long bonds go up 3 points and fall 5 points within a few hours is bound to discourage investors.

So buyers have gone on strike. How can a trust department or a fund or any serious investor be lured into the volatile and directionless market that now exists?

Buying a bond today becomes a risk transaction, so investors are shunning them. Volatility has become a bearish stigma that is keeping buyers from purchasing fixed-income issues, regardless which way the market is headed.

Last week's column noted that a corporate bond was being structured to deal with inflation. This week a $77 million tax-exempt environmental improvement revenue bond, backed by the U.S. Steel Corp., will be offered by E.F. Hutton. There are three separate issues within this A-rated offering.

The unique feature of this issue is a floating rate "coupon" that will change every six months based on a formula that is tied either to the three-month Treasury bill or the 80-year Treasury bond. Earlier offerings of similar bonds have hovered close to par in price.

On Tuesday voters in Massachusetts overwhelmingly voted to reduce their property taxes. This has ominous implications for Boston bonds and probably the state bonds too.

Ed Hosinger, the head of Oppenheimer and Co. municipal research, points out that since this newly passed proposition is a law it can be revised by the state legislature. However, in a worst-case scenario, the reduction of property taxes is harmful because expenditures are going up while revenues will be declining.

Hosinger therefore feels that the law will have to be revised, but because of the uncertainty involved Oppenheimer has lowered rating on Boston to that of a speculative bond.

The Massachusetts state bonds could be affected, because if Boston has financial problems the city will go to the state for aid. The state had been an improving credit, but the new law could put serious strains on the state's financial resources. According to Hosinger, this will cause the state's bonds to underperform the market.

Dean Witter Reynolds is bringing a $230 million Alaska Housing Finance issue that week. The long-term bond on this A-rated tax exempt issue could return 10-3/4 to 11 percent. Check your brokers for more details.