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Money-market managers at a $76 billion crossroads

You have $76 billion to invest. These are your alternatives: A. Lend it to US and foreign banks for a very short period -- anywhere from two to three weeks at a 21-percent interest rate.

B. Lend it to the same banks but for four to five weeks at a 20 1/2-percent interest rate.

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C. Lend it to the banks, or the government, for 2 to 3 months at a 19-percent interest rate.

These are the alternatives facing the managers who run the nation's money-market funds: If they guess the right direction in interest rates, they will garner still more money for their funds; if they are wrong, they risk losing accounts, and possibly money if they have to liquadate the fund to pay off customers.

At the moment, most of the managers of this $76 billion are investing it in Alternative A. William E. Donoghue's Money Fund Report, in a survey of 95 funds with assets of $76.3 billion, found that the funds have shortened their average maturity to 25 days. Mr. Donoghue, in an interview, noted that "this is the shortest it's ever been by two days." To him, "this says more about the direction interest rates are going than anything else." Obviously, they are going up. Mr. Donoghue said he believes rates will peak in the mid-20s before falling back to the 15 percent level later in the year. "Unless we get inflation under control," he continued, "they will head skyward again, maybe hitting 35 percent in the next two years."

Fred Henning, vice-president of Fidelity Management and Reserve Company, is one money manager who has been investing in Alternative A. The $4.4 billion run by Fidelity, Mr. Henning says, has a maturity of 20 days. He says the reason he expects rates to keep rising is that "credit demands are huge and there is no evidence they are starting to subside." Rather, he thinks the economic growth of November and December will keep credit demands high. Even if the economy were to tail off quickly in January, he says, the Federal Reserve Board will be forced to maintain short rates at a high level.

On the other side of the fence is Bruce Bent, president of the Reserve Fund, a money-market fund with $2 billion in assets. Mr. Bent says he thinks interest rates are close to peaking and has begun to move his fund's assets into longer-term deposits. Instead of having 22 to 23 percent rates, he says, "we will have 18 to 19 percent rates." Reserve Fund's average maturity dipped sharply this past August when the fund was turning over its money every 10 days, but now Mr. Bent says he feels comfortable aiming for a 30- to 35-day maturity. "You have to understand that we are putting out money at 60 days in order to lengthen the portfolio," he explains.

With rates rising sharply -- the prime interest rate hit 21 1/2 percent on Friday -- there have been news reports that many businesses will not be able to survive. At least one analyst, David Jones of Aubrey G. Lanston & Co., forecasts that these bankruptcies will spill over to the banks and that some banks will fail. Mr. Bent disputes this, however, noting that "bankers spread their risks; they are not fools." Mr. Henning likewise disagrees with Mr. Jones, noting that "the regulators watch the banks like hawks."

Nonetheless, for those investors who are anxious about the banking system, there is at least one fund group that avoids investing with banks, the Capital Preservation Fund I and II, which invest solely in government securities. The Cap II Fund, which invests in overnight securities, now has a seven-day average yield of 18.8 percent.

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For people who feel lost when dinner conversation turns to talk about interest rates and money-market funds, Mr. Donoghue has written a book entitled "William E. Donoghue's Complete Money Market Guide." It is due in the bookstores in mid-January at $12.95 and will be an alternate selection with Book-of-the-Month Club. Or, Mr. Donoghue says that for those who want one before their bookstores get it, write him at Box 411, Holliston, Mass. 01746 and send $15.95, which includes the price of shipping. He'll also send free samples of his newsletter on the funds. Even though the book hasn't been released yet, it is into its second printing -- an indication of how popular the publishers think it will be.

Investors began anticipating a peak in interest rates last week and stock prices recouped some lost ground. For the week, the Dow Jones industrial average gained 20.05 points, closing at 937.20. Volume was heavy all week. Oil stocks led the way, helped by the prospect of still higher world oil prices. Last week, Saudi Arabia raised the price of its crude by $2 per barrel. Also, Mobil Oil reported still more oil discovered off Newfoundland and Texaco reported a big natural gas discovery in North Dakota. Utility and telephone stocks were also stronger, as investors anticipated that interest rates would fall. American Telephone & Telegraph Company is a major borrower and unsettled bond markets make it difficult for it to borrow.

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