The bond market had all the characteristics of a free-falling safe last week. Record high yields were established with the sale of each new issue in the various markets.

The biggest bombshell was the triple-A-rated Washington Public Power Supply System issue for nuclear projects, 1, 2 and 3. These long tax exempts returned anywhere from 13 1/4 percent to 15 percent in 2017 and 2018.

These returns not only drove outstanding municipal bond prices lower so their yield would rise, but they affected taxable bonds as well. After all, with the long taxable Treasury bond returning 14.60, wouldn't you rather have a triple-A tax exempt returning 15 percent? With an emphatic "yes," the public purchased most of the WPPSS issue. The demand was so great that the issue was increased from $500 to $750 million.

In spite of these record yields, the outlook for the municipal market remains bleak, especially for power-authority bonds. In the troubled WPPSS projects 4 and 5, which have a lower rating (BAA1 and A minus), there is a stirring by participant members of the system, who are bound by contract to the "take or pay" arrangement for the power they receive, even though the projects may not be completed. In June, the WPPSS system ordered a slowdown on the construction of projects 4 and 5. Although the debt service on these bonds is funded until March 1983, questions are being raised concerning completion of the projects.

One of the participants is seeking a way out of the contract based on a hoped-for loophole which states that the WPPSS system must employ "prudent utility practice" in the engineering and construction of a project. A report issued by a board of inquiry authorized by the Senate of the State of Washington concluded that mismanagement was the primary cause for the WPPSS difficulties.

Although the effort by the participant to break the contract will probably fail, the spotlight is being focused on these huge power projects, whose costs are skyrocketing because of inflation, mismanagement and high interest rates. Should these power companies be denied access to the marketplace for whatever reasons, prices of many of these outstanding bonds would be jeopardized as well as the future of the projects.

Aside from these problems, the municipal market has yet to face the onslaught of the All Savers certificates. Based on the annual investment yield of 18.01 percent on the Treasury's year bill, which sold Thursday, the All Savers will carry an initial rate of 12.61 percent when they are issued Oct. 1.

This should cause short-term tax-exempt rates to adjust to even higher levels. Interestingly, on Wednesday, $1.6 billion of government-backed (HUD) project notes will be offered, with the bulk of the maturities falling during the first three months of 1982. Expected returns should be around 9 3/4 percent.