After a four-week rally, the bond market appears stalled as investors await further confirmation of improving fundamentals favorable to bonds. These fundamentals all hinge on the outlook for inflation.

The Reagan administration is counting on the credit-restraining policies of the Federal Reserve to harness inflation. As Beryl Sprinkel, the undersecretary of monetary affairs explains it, the tight money policies of the Fed are the key to reducing inflation.

Sprinkel pointed out in a recent interview that in the past, when the economy became weak, the Fed supplied credit too quickly to reverse the downturn. Now, the Fed must maintain credit restraint even if the economy falters in order to squeeze out inflation, although a recession might occur. Sprinkel added that the tax cuts, then would come quickly to the rescue to revive a weaked economy.

So it is the process that the market is focusing on, trying to see if any of these factors are happening. Is the money supply being held in check by the Fed holding a tight rein on credit, and just as important, will they continue to do so? Is the economy slowing, and finally, is the inflation rate abating?

The Fed's intentions are manifested in the marketplace, especially through the Federal funds rate, the rate at which member banks charge each other for the use of their excess reserves. And so the market zeros in on the Fed funds rate, and Treasury bills trade off the funds rate while the coupons trade off the bills and the corporate bonds trade at a spread off of the Treasury bonds. The end result is a market governed by every rise and fall of the Fed funds rate.

Even as the outlook becomes more positive, there are several worrisome situations on the horizon. The Middle East could cause a lot of trouble and certainly bears watching.

But the most hazardous possibility is the coming crisis in the savings and loan industry. The squeeze inflicted by high interest rates has put much of this industry on the brink of collapse. A huge government rescue could be needed and investors who have funds at S&Ls should be certain that these funds are insured by the FDIC or FSLIC. Single deposits are insured up to $100,000. Avoid any situation like retail repurchase agreements that are not insured.

Although expected, the downgrading of Washington Public Power Supply System bonds of Nuclear Projects number 4 and 5 by Moody's from A-1 to BAA-1, placed a pall over the municipal market. There are $2.25 billion of these bonds outstanding and their prices declined immediately.

Unfortunately, $3.68 billion of triple A bonds, bearing the same name, are surely to be tarnished through association.

The Treasury will sell two-year notes in minimums of $5,000 on Thursday. The news of a further decline in the monetary aggregates released late Friday afternoon put bond prices in orbit and make it impossible to hazard a guess at a return on the two-year note.