It was an exceedingly difficult week for the bond market. The opposite of what was expected to happen kept occurring.

The week opened on a positive note with bond prices advancing from the high levels that were reached on Friday of last week following the unexpected decline of the monetary aggregates. As bond prices continued to rise on Monday so did the federal funds rate, that key short-term rate that tells how tight credit is within the banking system. By Tuesday the funds rate had retraced its recent decline and once again was trading in the 20 percent area. The increased the dealers' costs for carrying their positions and necessitated lowering prices in hope of selling their inventory.

At the same time, the market was still in a state of euphoria for having performed so well in recent weeks. This boosted the hopes of corporate treasurers and investment bankers that new corporate issues could be marketed. So despite rising short rates led by the Federal funds rate, investment bankers marketed 11 different issues totaling $1.575 billion by Thursday.

The 10-year issues ran the gamut in reutrns from 14.1 percent on a triple A issue to 16 percent on the BAA Western Union offering. Long corporate bonds returned 15.08 percent on the triple A New England Telephone issue. Because it was cheaper for the corporations to finance in the seven- to 10-year maturity range, only $400 million of the new issues were long bonds. The cheapness arises because the Treasury yield curve is negative (higher rates in the short maturities), and the corporate curve is positive (higher rates int he longer maturities). Consequently the shorter corporates can be priced at closer yield spreads to the Treasuries (+75 basis oints), which is preferable to pricing the longer corporates with at least 175 basis points more yield than comparable Treasuries.

But by and large, technical conditions were responsible for much of the market's gyrations. Approximately $16 billion of Treasury securities had to be paid for last week. This meant that the dealers not only had to pay for the securities, but also had to finance their unsold inventory. As dealers scurried about for money to carry their swollen positions, bank lending rates to dealers rose from 17 3/4 to 20 1/4 percent.

At the same time the Fed was trying to drain excess reserves from the system so everyone was totally confused. The financial futures market did not know which way to go, the dollar was doing beautifully as short rates jumped, the price of gold began to fall, the Democrats and the president couldn't decide on a tax cut compromise and finally out of all this chaos and confusion, the market decided it had had enough and began to rally Thursday afternoon.

Despite encouraging economic news for the market on Friday morning, bonds tried to rally but sank quickly under the weight of a 20 1/4 percent funds rate along with the high cost of carry for the dealers.

So we are currently in a market that is governed by the federal funds rate. When that rate declines, our market should imprive.

There are attractive issues available in the various markets in the two- through five-year maturity range. The Department of Housing and Urban Development will offer on Tuesday $1.1 billion of tax-exempt project notes due in November and December of this year. Returns should fall between 7 3/4 percent and 8 percent.