When someone asks how the bond market is doing, the most common response has been to relate the price direction of the U.S. Treasury market. This has been so because the Treasury market is the largest of the bond markets, has the greatest liquidity and reflects most accurately the monetary policy of the Federal Reserve.

Because of these factors, the corporate and municipal markets have been geared to the various yields found in the Treasury market. For example, long telephone bonds might have traded at a 150 basis-point spread over long Treasuries. Or, prime municipal bonds might have sold to return 65 percent of the yield on long Treasuries.

In other words the movement of interest rates in the other bond markets have been closely entwined with the U.S. Treasury market. The rise or fall of rates on Treasuries would lead to similar movements of rates in the other markets. Consequently the true direction of interest rated could usually be ascertained by watching the Treasury market.

The use of the futures market by Treasury bond dealers, arbitrageurs and speculators has changed all this. These participants have turned to the futures market to make a profit and to protect themselves from the price volatility of the marketplace.

In an oversimplified explanation, the participants move back and forth between the cash market and the futures market as price differentials make it profitable to do so. These price movements more often than not have nothing to do with the future inflation number, as reflected by the Consumer Price Index (1 percent higher in October), which is bearish for bonds, the long Treasury market and had nothing to do with inflation.

The futures market stops trading at 3 p.m. each day. Often dealers will force the price of long Treasuries higher by purchasing bonds before the cash market closes. At the opening of the futures market the next morning, since the prices of the cash and futures market tend to be similar, the price of long Treasuries in the futures market will quickly advance. The opposite may also occur.

The result of all this movement between the two markets is price volatility and incorrect interest rate directions. It is an accepted fact now that the bond dealers no longer need the inquires of legitimate retail buyers with which to maintain markets.

As beneficial as the futures market maybe to the dealers and to speculators it is certainly not reassuring to the many investors who look for ligitimate clues as to the true direction of the fixed income markets.

The time has come for bond buyers to take a new look at their investment strategy. In the past, buyers were content to buy and hold long bonds to maturity. Sooner or later they realize that their market value had greatly declined.