For the past several weeks the bond markets have been in the doldrums. Most bond business is transacted in the morning, and if it weren't for the Iran-contra hearings, you would probably sleep through the afternoon's trading.

Even in such an atmosphere you can have diverse activity in the same market. A good example of this can be found in the municipal market. To quote from Municipal Market Data Inc.'s report of July 28, "Considering the limited demand component, the municipal bond market is receiving a positive boost from the very light supply conditions. The secondary float, at $1.6 billion, is 15.8 percent below its 250-day moving average. Meanwhile, the volume of bonds scheduled on the forward calendar has fallen 32 percent below its annual average."

That certainly tells the story about what has been happening with new issues having maturities of more than a year. But it doesn't tell the story about what has been occurring in the one-year-and-under sector of that market, which is known as the "note" sector.

The volume of new notes was once formidable, but has been declining. According to the Bond Buyer, in 1984, $31 billion were issued, in 1985 it was $19 billion, and in 1986, $20 billion. But the Tax Reform Act of 1986 has severely curtailed the issuance of notes this year, with only $6.2 billion having been issued during the first six months of 1987.

Many of the note issuers had been selling issues in excess of their actual needs. The excess was then invested, and the income accrued to the issuers' coffers. However, the new tax act prohibited this activity, significantly curtailing the issuance of notes.

In addition, with the big sell-off in the muni market in April and May, the mutual funds suffered heavy redemptions. Consequently, the funds, which are heavy buyers of notes, are just beginning to see a pickup in the inflow of money from investors, and their demand for the notes has been minimal.

Currently, several large note issues have either been sold or are scheduled to be sold. With the sudden shift to a big note calendar, and with little cash flow into the tax exempt funds, interest rates have risen at least 100 basis points in the note market over the past two weeks. So the investor who is worried about rising interest rates can take refuge in the shorter end of the tax exempt yield curve and benefit from the currently higher short-term rates. James E. Lebherz has 28 years' experience in fixed-income investments.