The continued slowdown in the growth of the money supply has led to a more positive market psychology. The fact that yields on Treasuries had risen to attractive levels throughout the yield curve was not overlooked by investors. Another week of slow M1 growth was needed to spark buyers into action. When this occurred two Fridays ago, speculators, retail and foreign buyers leaped into the market, which led to a four-point upswing on the new 30-year Treasury. Volatility is still with us, but at lower yield levels.

By Thursday, the market had moved from an over-sold position to an over-bought position. The new lower rate levels that were reached were more in line with a federal funds rate of 9 1/2 to 9 5/8 percent. As the yield spread between T bills and the long Treasury declined, and the yield curve flattened out, much of the steam went out of the rally. Should the slowing in the growth of the aggregates endure, prices will continue to rise and yields decline. For the rally to persist and be sustained, short-rates, and especially the federal funds rate, must fall below 9 1/2 percent.

For the federal funds rate to decline, something other than the slowing of the money growth must occur. Either the robust economic recovery must show signs of deteriorating, or there must be a change in fiscal policy, or both. Right now, neither seem to be in the cards, so for the present, bonds should continue to move within a trading range.

On a near-term basis, investment decisions will be more difficult in this tough market. In the municipal market, the heavy stream of housing and hospital revenue bonds has made these types of issues cheap in comparison to high-grade government obligations and electric revenue issues. An investor could move from a long-term, high-grade tax-exempt into a hospital or a housing bond and increase yield by 130 basis points.

Government securities are cheap to agencies, corporates and most municipals. Intermediate governments in the five- to 10-year range offer the best risk-reward relationship at this time. In other words, since the return on the 10-year Treasury is the same as the return on the 30-year Treasury, it really isn't worth the market risk of extending 20 additional years.

The Treasury will offer a two-year note on Wednesday in minimum denominations of $5,000. It should return 10.80 percent.