If the record-setting stock market is a powerful locomotive forging ahead in fits and starts, the bond market might be compared to a bus that occasionally careens out of control.

A flick of the interest-rate switch, international intrigue, government probes and campaign promises can toy with this powerful vehicle's accelerator and brakes.The 1996 road course for bonds has featured plenty of surprises among some popular types:

U.S. government bonds are suddenly in demand, with foreign investors from China, Japan and Germany placing tens of billions of dollars in buy orders since the Federal Reserve decided against boosting interest rates. Some experts believe American investors should join the rush.

"It's a good time to be invested in 30-year Treasury bonds because inflation is running at about 2 percent, with attractive bond yields at around 7 percent," asserted Van Hoisington, portfolio manager for the Wasatch-Hoisington U.S. Treasury Fund, fourth among government bond funds this year with a 2.75 percent total return by emphasizing bonds with average maturity of 25 years. "Continued declines in the U.S. budget deficit are positive."

In the next 12 months, Hoi-sing-ton believes, rates on long Treasuries will fall back toward 6 percent. Foreign investors have gotten this message.

"The dollar has been strong and improving, so exchange risks for foreign buyers are minimal, and there may be potential for price appreciation," explained Donald Maude, chief U.S. economist for Scotia Capital Markets U.S.A. "Yields on Treasuries are more than foreign yields, especially in countries where monetary policy is easing and rates declining."

The municipal bond market is coping with political proposals that could curb its favored tax status, a broad federal investigation into market abuses around the country and a general lack of supply.

"Talk of tax cuts and potential tax reform have been dominating the muni market," observed Martin Mauro, senior economist and fixed-income strategist for Merrill Lynch. "If (Republican) Bob Dole's presidential candidacy were to gain steam, municipals would suffer because of prospects for tax reform, while a Clinton win would mean some market improvement."

The fact that investigators are now combing the muni market for abuses has meant difficulty in trading and pricing some bonds, though fund managers say the real effects of all this will depend on what tone the final findings take. Managers have more pressing current problems.

"Municipal bonds are facing a dearth of supply, which has prompted some higher prices, and, as a result, yields have been down relative to Treasuries for several months," pointed out Steven Harrop, portfolio manager for Strong Municipal Advantage Fund, third in return among muni funds this year. "Unless additional supply comes on, munis are likely to continue to be expensive relative to Treasuries."

Study these bond markets carefully before you invest.

"Treasury bond funds are a pure play on interest rates, and this has obviously been a difficult time, with the average fund down 0.76 percent year to date," noted Alice Lowenstein, fixed-income editor for the Morningstar Mutual Funds investment advisory. "Short-term funds have done best."

The highest total returns in Treasury bond funds for 1996, according to Morningstar, are:

- Eaton Vance Short-Term Treasury, Boston; $52 million in assets; no-load (no initial sales

charge); $5,000 minimum initial investment; average maturity 30 to 40 days; up 3.42 percent.

- Permanent Portfolio Treasury Bill, Petaluma, Calif.; $111 million; no-load; $1,000 minimum; maturity 62 days; up 3.23 percent.

- AIM Limited Maturity Treasury, Houston; $363 million; 1 percent load; $500 minimum; maturity 1.5 years; up 2.95 percent.

Muni funds have similarly been upset by rate turbulence this year, but the average fund has risen 1.16 percent because of strength of both the U.S. economy and bond issuers, Lowenstein added. Flat tax proposals hurt last year, but some ground lost versus taxable bonds has been made up.

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The top national muni funds in 1996 are:

- Davis Tax-Free High Income, Santa Fe, N.M.; $155 million; 4.75 percent load for Class A shares and declining back-end load for B; $1,000 minimum; average maturity 15.6 years; up 4.09 percent.

- American High-Income Municipal, Los Angeles; $229 million; 4.75 percent load; $1,000 minimum; maturity 10 years; up 3.65 percent.

- Strong Municipal Advantage, Milwaukee; $417 million; no-load; $2,500 minimum; maturity 0.9 years; up 3.55 percent.

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