The near-term outlook, as well as the psychology concerning the bond markets, have changed overnight. As the large Treasury refunding of two weeks ago was being absorbed by investors, the outlook for the market was all roses. Participants felt that there was a good possibility of a discount-rate cut by the Federal Reserve and that the long-term Treasury bond would sell through 10 percent and perhaps as low as 9.50 percent. In addition, the bond community anticipated that the monetary aggregate M1 would also decline.

In this euphoric atmosphere of two weeks ago, dealers purchased much of the $15 billion refunding and corporate underwriters rushed to market 20 separate issues, totaling $2.7 billion. Most of these new corporates came in the last two days of the week. So chaotic was the scene that, in many instances, not only were the buyers unaware of the various new issues, but also sales personnel for the Wall Street firms were oblivious to many of the new issues.

The rosy outlook was dashed two Friday afternoons ago, when the money supply number was much larger than expected. Buyers withdrew from the markets and there was no follow-through on the purchasing of the new Treasuries from dealers who were laden with so much of the refunding. Buyers also shied away from aggressively priced corporates.

From that point on, the market was in trouble, and although prices rose early last week because of technical factors, prices declined through the remainder of the week as the best-laid plans of dealers and investors went astray. Concurrently, as this painful drama was unfolding, various economic data releases created confusion as to the real direction of the economy, the increased possibility for an earlier renewal in the growth of inflation, as well as the fading dream for an early cut in the Fed discount rate. Further, two sizable tax-free issues, the Alaskan housing and the San Antonio electric revenue issues, were priced too high and sold poorly. That meant that dealers were not just flush with Treasuries and corporates, but with municipals as well.

As the economic data continues mixed--history repeated itself Friday as the money supply figures were much larger than anyone expected--buyers will withdraw to the sidelines until a clearer picture of the overall market occurs.

As prices are cut on merchandise, many issues will become attractive. Investors must now decide if interest rates are at the lows for this cycle or not. If the answer is yes, then any purchases should be confined to short maturities. If the answer is no, rates will go lower. Then, longer maturities may be purchased for appreciation and to lock up the current high yields. After Friday's Federal Reserve monetary information releases, confusion should abound.