The four-year and seven-year Treasury notes were auctioned last week. They carried an average return of 9.24 percent and 9.51 percent, respectively. These were the highest returns on these two issues in two years.

From mid-July to Oct. 6, the price on the U.S. Treasury 30 Year Index has declined 10.7 percent, while the price on the Actively Traded Dollar Bond Index (measures price changes on long tax-exempt revenue issues) has declined 12 percent.

This dismal performance in the U.S. bond market simply mirrors the price/yield movements in the worldwide fixed-income markets. As some analysts like to point out, "we are in a worldwide bear market" in bonds.

Since Sept. 1, yields on the 10-year Japanese bond have risen 160 basis points, while yields on the 10-year German "bunds" have risen 50 basis points.

This universal increase in interest rates is being caused by real or perceived inflation fears. Much to the chagrin of U.S. officials, this increase in worldwide interest rates places upward pressure on U.S. rates. Since Sept. 1, yields on the U.S. 10-year T-note have jumped 76 basis points.

In other words, in an effort to keep foreign investors purchasing our Treasury debt, we must maintain a certain "yield spread" or "premium" in our yields, over the yields offered on foreign securities.

The problem with this situation is that the higher rates go worldwide, the greater the likelihood of a worldwide economic slowdown.

This creates a dual problem for the United States. If the foreign economies slow, their demand for our exports will be curtailed and the opportunity to reduce our trade deficit will founder.

At the same time, slow economic growth in the United States could eventually lead to a recession, which would trigger greater government spending to shorten the recession. This in turn will lead to a larger federal deficit, which is at the heart of our problems in the first place.

Further, if this scenario unfolds, then we would once again look to a further depreciation of the dollar to rectify our trade deficit.

If the dollar is then going to lose more of its value, foreigners will demand an even larger "premium" before purchasing our debt. This means higher interest rates, etc., etc., etc.

So you see the immensity of the problem and the hard choices that politicians, both at home and abroad, have to make, and why those decisions may be slow in coming, especially in an election year when all of the marbles are up for grabs.

Regardless of the decisions made by the major industrial nations, it would appear that we will all face "slow growth" economies into the 1990s.

On a long-term basis -- 1973 to 1986 -- the trend in our economic growth, as measured by the gross national product, has been 2.4 percent. With the prospect of either higher interest rates or, at best, the leveling off of rates at current levels, the GNP growth figure could fall below 2.4 percent a year.

Until the direction of the economy and interest rates becomes more certain, investors should not venture into maturities beyond three years.

Longer maturities could lead to market risks, which would cause an erosion of principal.

James E. Lebherz has more than 28 years' experience in fixed-income investments.