The bond market and Bill Clinton make an interesting study.

Bond prices fell from late July until late October, largely on the knee-jerk perception that a Clinton victory would mean a return to tax-and-spend government and more rapid inflation.

A few days before the election, the bond market turned, and it has staged a decent recovery for the past week, apparently on the view that a Clinton administration won't be so bad after all. For the President-elect, the bond market's advance must have been a pleasant reassurance.

Other factors were at work last week, to be sure. The decline in bond prices this fall lifted yields to more attractive levels and made the market ripe for a turn. This is the way securities markets behave, and just because bond prices rose during the week of Bill Clinton's victory is hardly proof that they will continue higher very long.

Furthermore, the economic news remained doleful. These were the headlines last week: "Economy Seen Slow in Future, Index Shows," "Building Index Shows 3% Drop for September," "Economic Activity Is Still at Snail's Pace Across Nation, Latest Fed Survey Finds," "Trade War Opens With $300 Million U.S. Tariffs on European Community." All good stuff if you want higher bond prices and lower interest rates.

Then, too, the municipal bond market was stronger relatively than the rest of the credit markets, the direct result of Clinton's proposal to raise the top tax rate to 36% from 31% on families with incomes over $200,000. The increase, of course, will make tax-exempt municipal bonds more attractive vis-a-vis other fixed-income securities. And indeed last Friday morning, when the Treasury market was sagging a bit, municipal bond prices still showed gains.

But what of the longer term? Can the bond market continue to move toward higher prices and lower yields if Clinton ushers in the era of hyper-government his campaign seemed to promise?

Clinton's strategy is to invest more that $50 billion a year for four years while cutting the deficit in half, to "create millions of high-wage jobs and help America compete in the global economy." His career as governor and as founder of the Democratic Leadership Coalition indicate a conservative fiscal bent to balance his activism. He has close advisers from Wall Street such as Robert Rubin of Goldman Sachs and Felix Rohatyn of Lazard Freres.

Meantime, business activity is without much muscle worldwide, and prices are under control. There is much to be said for the optimist's case for the bond market - but then nobody has yet seen how Clinton and a Democratic Congress will act when they take control together in January.

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