New York State again last week was forced to announce that it does not have its budget in balance. Its spending will exceed its revenues by $689 million this fiscal year, and its leaders are working to bring its accounts into line.

New York is not alone. A survey by the National Conference of State Legislatures last week showed that states generally are in weak financial condition, and it predicted that they could be in worse fiscal shape next year, even though they are cutting spending and raising taxes at a record rate.

For bond issuers and bond investors, these financial difficulties are important. At bottom, they mean that its' a good time to sell bonds and a bad time to buy them.

Why a good time to sell? Interest rates, by some measures, are at their lowest levels since 1979, and that's good news for issuers. Nominal rates of interest on long-term revenue bonds are back to where they were before Paul Volcker and the Federal Reserve drove them sky-high in the early 1980s to break the back of double-digit inflation.

Why a bad time to buy? Nominal yields are too low, to be sure, but real rates -- that is, yields adjusted for inflation -- are attractive, so why not go ahead? The problem is that inflation is likely to rise once again, at least before long-term bonds mature.

If you are convinced inflation is indeed under control, then you can reject this argument. We find it difficult, however, to accept the premise that inflation will stay put throughout the 1990s, and we believe inflation-adjusted yields on fixed-income investments will be squeezed.

Debt at all levels of goverment is too large, and economic activity is too low for bonds to be paid off with constant dollars. Investment in research and development and in productive plant and equipment was neglected during the 1980s, and real economic growth in the 1990s will suffer. The economy will not expand fast enough to enable all government borrowers to pay off their debt, and taxpayers are not about to accept further tax increases to help them. Higher taxes would be partly counterproductive at this point anyway.

Economists would like to see states do some pump priming to help end the recession, but all the states except Vermont are required by their constitutions to balance their books each year. Unlike the U.S. Congress, state legislators must pay serious attention to money and may not incur ever-larger deficits. As a group, state governments worsen their own plight.

In these baffling circumstances, low nominal yields and declining real yields make investment in bonds unappealing these days. But they are great days for borrowers.

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