In spite of an increase in the federal funds rate (the rate banks charge for the use of their excess reserves)and the repo rate (the overnight cost that dealers must pay to finance their bond inventory), the bond market continued to show strength and improve in price. Market participants have been expecting a price correction, which has yet to materialize.

From a fundamental viewpoint, the extremely weak economy argues for lower interest rates. Even the rapid growth in the money supply and the escalating federal budget deficits will seemingly do little to halt the decline in rates.

Not only are the worldwide economies in the doghouse, but the Federal Reserve is finding itself in a bitter political fight in Congress to maintain its freedom. Members in the House are trying to introduce legislation to take away the Fed's cherished independence and to force the Fed from its current monetary policy of controlling money to one of controlling and lowering interest rates.

The Treasury also is examining the Fed's recent policies of record high interest rates which KO'd the economy. Obviously at election time, memories grow short when it should be recalled that for the longest time, the Fed was the only force doing battle with inflation.

At any rate, with the Fed having been backed into a corner, the market perceives that the central bank would not do anythng now to further harm the economy. Raising interest rates could sound the death knell not only for the economy, but for the Fed's freedom as well. The market is in a consolidating phase now, awaiting a further decline in short-term rates.

This decline will occur when the demand for short-term credit is reduced both at commercial banks and in the commercial paper market. When this happens, short rates should fall further, forcing longer rates to decline as well. This phenomenon bears close watching, for if and when it occurs, it will initiate the next phase of the rally.

During October, approximately $30 billion of the tax-exempt All-Savers certificates will mature. Brokerage firms, mutual funds, unit investment trusts and financial institutions all are hoping to land some of this big pie. The fact that many investors have gotten a taste of tax-exempt income should direct many of the certificate holders into the tax-exempt area.

In looking at the municipal market we see that the demand by unit investment trusts for high yielding long-term revenue bonds has reduced the yields available on those securities. At the same time, the recent large supply of new high-grade general obligation issues has poured into the market. This has prevented the rates on high-grades from declining a lot.

Therefore, on a relative basis, the high-grade general obligation issues are cheap when compared to revenue issues. And 30 percent, or $895 million, of the 30-day forward supply of new issues will feature more high-grade issues. In looking at the ratio of high-grade triple-A municipals to similar Treasury maturities, we find that the 10- and 20-year maturities are especially attractive, being close to the maximum ratio that has existed during the last three months.

On Tuesday, $2.4 billion tax-exempt, government-backed (Department of Housing and Urban Development) project notes will be sold. They will mature monthly from February through November of 1983. The six-month note should return around 5 percent, while the year notes should be around 6 percent. The current ratio of the six-month project note to the six-month T-bill is about 55 percent. Since the maximum ratio has been 63 percent, the probable 5 percent return on the new project note can be considered rich.