Since Black Monday, the fixed-income market has been in a strong rally. On Oct. 16, the yield on the 30-year Treasury bond was 10.23 percent. By Feb. 11, the yield had declined to 8.27 percent. That's an appreciation in price of 19.15 points, or $192 per $1,000 bond. In the same period, the Bond Buyers' 30-Year Revenue Bond Index fell from 9.59 percent to 7.76 percent. That represents a gain 20.5 points, or $205 per $1,000 bond.

Have rates hit bottom? Will they continue to decline? Or will they begin to move higher as the year goes along?

It would appear that for the first time in a long time we are relying more on fundamentals for the answers. Instead of tea leaves, we are looking into the health of the economy. Not that the dollar or the trade deficit or any of these other factors are not as important as before; they are. But the state of the U.S. economy has assumed more importance, especially to the financial markets.

The Group of Seven's strong support of the dollar has for the time being made dabbling in the U.S. currency hazardous and, at best, unprofitable. Inflation seems to be under control, so the price of gold has shown a steady decline. The trade data can certainly effect the markets, but that information is always six weeks old when it is released and is far from reliable. And since the Iranians have stopped firing on our tankers we have almost forgotten about the price of oil.

So almost by default we are returning to the economy, but for good reasons. First, you can only be sidetracked for so long by all the static that goes on around the periphery of the economy. Sooner or later that static either is resolved or loses its importance.

Second, the U.S. economy is still the biggest in the world. "Twin deficits" or not, if this economy falls into a recession all of the other economies in the world will be affected. So it is in everyone's best interest to see that the United States keeps perking along. After all, who wants to kill the goose that lays so many golden eggs?

Last, this is an election year. The Republicans realize that the country votes its pocketbook, so it is in their best interest to see that the economic ship doesn't go aground, at least until after Nov. 8.

The Democrats would not like to see the economy in tatters either, especially when they have so many issues to home in on. Certainly the trade and budget deficits, protectionism, the farm situation and energy problems are enough ammunition for two elections.

The fact that this is an election year makes it difficult for the Federal Reserve to execute monetary policy without being criticized. For the past five weeks, the Fed seems to have been easing the credit reins. Total reserves and nonborrowed reserves have experienced rapid growth, which has led to a half-percentage point drop in the key federal funds rate. Some analysts believe the Fed is four to six months late.

Obviously the Fed must believe the economy is struggling. It has opened the faucet just a bit, and how it reads the economy will determine how much more the Fed pursues the easier money policy.

This is certainly not a time to be reckless and buy long-term bonds, but if the economic data continues to be unfavorable, you can be sure the Fed will continue to ease. At that time it would be prudent to purchase some longer maturities for price appreciation.

James E. Lebherz has 28 years' experience in fixed-income securities.