Interest rates fell dramatically during the second half of 1982, despite the largest municipal, corporate and Treasury offerings ever compressed into a five-month period.

The forces that shaped this precipitous decline in rates were the weakness of the U.S. economy and the Federal Reserve Board's change in monetary policy.

As 1982 began, many analysts were looking for an imminent recovery and a lowering of interest rates. The Federal Reserve adhered to its stringent monetarist policy, however, and interest rates remained high. At the same time, heavy Treasury borrowing also helped to keep rates at high levels during the first half of the year.

The growing weakness in the economy became apparent in late spring. Both domestic and international financial systems began to crack. First there were the failures of the Drysdale Government Securities firm and the Penn Square National Bank. Internationally, financial confidence was shaken by a banking scandal in Italy and the colossal debt problems of Mexico, Argentina, Brazil and other Third World countries.

The Federal Reserve, faced with a tidal wave of financial catastrophies plus rising unemployment and a feeble economy, decided to change from its monetarist policy to a more pragmatic one. The new policy represented a deliberate effort to bring interest rates down, regardless of the behavior of the monetary aggregates.

Consequently, the Treasury was able to market a record supply of securities with only a minimal effect on interest rates. Further, because of the weakening credit demand in the private sector, private borrowers were not crowded out.

The Drysdale fiasco in May shook the market through the summer, bringing into question repurchase agreements, which are the major means used by bond dealers to finance their inventory. Had not the Chase Manhattan Bank, which had acted as agent for Drysdale, paid $125 million in accrued interest owed to various dealers by Drysdale, the entire bond community would have been jeopardized. Money Markets

Short-term interest rates remained at double-digit levels until mid-August. In fact, until mid-June there was a "negative yield curve," in which short-term interest rates were higher than long-term rates. It was during this period of strong credit demand that most money-market instruments continued to expand.

Commercial paper--unsecured promissory notes issued by finance companies, banks and business firms--peaked at $183 billion outstanding in July, before declining during the last half of 1982. This growth through July represented an $18 billion spurt from the end of 1981.

Tax-exempt commercial paper, which is issued by a municipality or an agency of a municipality, expanded 41 percent to $4.1 billion outstanding, with as many as 85 different issuers of such paper.

As the demand for bank loans fell during the last half of 1982, so did the need for banks to raise money through the issuance of certificates of deposit. CD issuances peaked at $149 billion in September, after having grown by $16 billion since January.

Bankers' acceptances, which are negotiated time drafts used to facilitate world trade, grew about 10 percent to $76 billion, as new bank regulations made their issuance more favorable for banks.

Money market funds expanded about $59 billion and peaked at $242 billion in early December. Superior growth occurred in the Treasury and agency funds, which jumped 105 percent, and in the tax-exempt money market funds, which tripled to $14 billion in assets. Treasury & Agencies

Rising federal deficits increased the Treasury's demand for borrowing to record levels. By the end of the year, the outstanding public debt had grown to $1.187 trillion, up $159 billion for the calendar year. About $113 billion was paid out in interest on the public debt.

Unofficially, the Treasury borrowed a total of $847 billion. Of that amount, $169 billion represented new money. About $17 billion of the new funds was related to off-budget items and was financed for the Federal Financing Bank through Treasury offerings.

The overall borrowing of net new funds by the three leading federally sponsored agencies, the Federal Home Loan Bank, the Federal Farm Credit Bank and the Federal National Mortgage Association, fell $10 billion from 1981 to $16 billion.

The Student Loan Marketing Association made its debut in the public market in 1982, borrowing $2 billion in new money. The Government National Mortgage Association increased the amount of its mortgage pass-through securities to $143 billion, up $16 billion over the year. Municipals

Volume was the big item in the tax-exempt arena. Total long-term financings soared to a record $70 billion. This compares with the former peak of $47 billion in 1980 and 1981's volume of $43 billion. Of the huge 1982 volume, 68 percent was revenue bonds; 21 percent was state and municipal housing financing bonds; and 67 percent involved negotiated issues, as opposed to competitive sales.

There were several reasons for this massive outpouring of new municipal securities: the reduction of federal grants to state and local governments, plus the additional loss of revenues to these entities because of the recession; many issuers trying to sell bearer or coupon bonds prior to enactment of yearend registration requirements; the desire of housing-bond issuers to use up their allocation before yearend; the change in the law that would limit the issuance of industrial development bonds beginning in January 1983; and the initiation of a 15 percent tax, effective this month, on the interest paid by commercial banks to carry new-issue municipal bonds.

These factors along with the rally were responsible for the high volume, which in turn kept tax-free yields at relatively high levels compared with taxable yields. Consequently, on a ratio basis, the tax-free securities were extremely cheap in comparison with equivalent taxable bonds.

As a result of these attractive rates, 70 percent of all new issues were purchased by individuals, either outright or through trust departments, bond funds or unit investment trusts. Corporates

Corporate issues began to rally in early August, when long-term AA-rated public utility bonds were yielding about 15.5 percent. By the end of November, new AA utility issues were returning 12 percent, a phenomenal decline of 350 basis points in yield and an increase of over 30 points in price. In those four action-packed months, a record volume of $21 billion of new issues was sold.

Also noteworthy was the competitive struggle with the Eurodollar market in London. The overseas market has matured during the last four years, and as a result, the volume of U.S. credits marketed in London rose 133 percent in 1982 over 1981. Euro-Bond Market

Prior to 1982, managed foreign fixed-income money had been mostly invested in European bank securities of one type or another. The international banking crisis caused a flight from this bank debt paper into what was perceived as the safest debt around, that of U.S. corporations that were financing in the Euro-bond market.

This huge demand in Europe for U.S. paper allowed many American borrowers to finance in Europe at rates cheaper than the U.S. government was able to finance here at home. Consequently, the breadth of the Euromarket increased along with attractive rates for issuers. It is estimated that $14.5 billion of U.S. credits was financed in 1982 compared with $6.2 billion in 1981.