The shifting sands of change are no more evident than in the events that have occurred in the short-term tax-exempt market -- 13 months and shorter -- over the past three years.

Three years ago, this sector of the market was dominated by short-term Public Housing Authority notes (PHAs) that enjoyed the highest credit rating in the municipal market -- AAA -- because they were backed by the federal government through HUD. There was about $12 billion outstanding when the Internal Revenue Service ruled that PHAs should not be tax exempt, leading to the phaseout of these notes as they matured.

The tax-exempt commercial paper market began to grow over the same period as issuers saw the insatiable demand for this instrument by the tax-exempt money market funds. The instruments, with maturities of between one week and six months, enabled portfolio managers to structure their short-term needs as their strategy dictated.

A plus for this type of paper was the ability to lock in an interest rate for a period of time -- say, three months -- if you felt rates were going to decline. However, on the minus side, if you were wrong, your principal was at risk. By the end of 1984, about $7.2 billion of tax-exempt commercial paper was outstanding.

Currently, the new rage both for issuers and investors is the variable-rate demand instrument (VRI) -- sometimes called a "lower floater" because its interest rate is lower than that of long-term bonds. Market specialists estimate that there are about $20 billion of these securities outstanding. These tax-exempt issues usually have a long final maturity (25 to 30 years); come in denominations of $100,000; change their interest rates (according to a formula) either daily, weekly or quarterly; are held in safekeeping for individual investors by brokerage houses, and may be "put" back to the "remarketing agent" (usually the managing underwriter) at par ($100,000 per minimum) on seven days' notice.

VRIs are supported either by a standby letter of credit or a line of credit from a bank. As a result, they enjoy high credit ratings both as bonds and as notes. Currently, the weekly VRIs rated AAA/AAA are returning 5.50 percent, the AAA/AAs are returning 5.55 percent and the AA/AAs, 5.60 percent. In a week's time these rates will be changed according to market conditions. In contrast, high-grade tax-exempt commercial paper is returning 5 1/8 percent in 90 days, while a top-rated note returns 5.20 percent in one year. For an investor in a high tax bracket, these returns and the protection of principal are excellent. However, should interest rates decline, the interest rates on VRIs would similarly decline.

It is interesting to note that short-term rates, in particular, have risen anywhere from 50 to 100 basis points since May. (A basis point is 1/100th of a percentage point.) This rise in short-term rates has been caused by an increase in the supply of VRIs, the remarketing of one-year "put" bonds with their new annual adjustment of rates (5.25 percent three weeks ago; 6 to 6.10 percent now) and finally, the fact that many investors turned in their "put" bonds to invest in longer securities. For anyone in the high tax bracket who can invest in increments of $100,000, VRIs are certainly worth a look.