The entire fixed income world was engaged in a waiting game this past week. There was a general lack of demand on the part of buyers as they tried to read the tea leaves and decide on a course of action.

The government bond dealers continued to hold large bond positions that they had acquired from the recent quarterly refunding. Although nervous and concerned, they were waiting hopefully for some good news from the Federal Reserve or for some bad news economically -- which ironically, is good news for bonds -- to bail them out of their inventory. By midweek, the new 30-year Treasury bond was about a point under water, while the new 10-year note was a half point below the average cost from the auction.

On Thursday, a rumor from the foreign exchange market suggesting that the Fed was about to cut the discount rate touched off a surge in bond prices. A poor retail sales number added impetus to the rally. Scott Winningham, a monetary analyst at McCarthy, Crisanti and Maffei, indicated that he thought the rumor was credible, but felt the discount rate would not be cut until the federal funds rate had fallen to the 8 percent level. It had been stuck at 8.50 percent for several weeks.

But the Treasury market was still waiting to see what would actually happen with the discount rate as well as the new supply of Treasuries -- a two-year note this week, a five-year note next week, plus a year bill and a cash management bill yet to be announced for this month. One thing is sure, if the Fed wants rates lower, it will have to lead the way.

In the municipal area, the market has been waiting for the supply of new issues to materialize. So far, the new-issue calendar has been sparse and the market erratic. The muni market loves a large calendar, and it will establish a direction when it has a good supply of issues to feed on.

While we await for future events to unfold, the Treasury will offer a two-year note on Wednesday, in minimum amounts of $5,000. They should return around 9.70 percent.