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The May employment report, which disappointed some pundits, set the U.S. Treasury securities market on fire on Friday when jobs added to non-farm payrolls fell short of estimates by more than 50 percent. Treasury yields, which move in the opposite direction of prices, plummeted, as traders suspected that this sign of weakness would halt rate increases after the June 30 Federal Reserve meeting.

The yield on the benchmark 10-year note that lenders use as a guide to set rates briefly touched 3.81 percent and remained below 3.84 percent for a good part of the morning. But failure of the yield to breach the 3.80 percent level and bearish remarks by Fed Governor Edward Gramlich turned Treasuries around.

In a speech Gramlich said that he did not know 'what inning we're in,' referring to comments by Dallas Fed president Fisher on Tuesday. Fisher said the Fed was in the eighth inning of a game heading into the ninth with regard to rate hikes. This remark was widely regarded as a clue that the Fed might pause in its credit-tightening program after its next meeting, and it sparked a huge Treasury rally.

But Gramlich's comments on Friday appeared to refute that notion. Sellers took over and the 10-year note gave back all the gains over the past three days, as the yield rose to a still-low 3.98 percent. Mortgage rates, which are based on Treasury yields, continued to move down, however, as they lag movements in the bond markets - often by a day or two.

Only 78,000 jobs were added in May - short of the 180,000 that were expected and far less than the 274,000 jobs created in April. Inflation worries were quelled when hourly wages grew by an expected 0.2 percent, to $16.03 an hour. The unemployment rate, which is determined from a different survey, fell to 5.1 percent - the lowest level since September 2001.

In a separate report, the Institute of Supply Management (ISM) survey of conditions in the service sector slid to 58.5 in May from the April reading of 61.7. Analysts were expecting the index to edge down to 61. The report was a non-factor, however, as attention was focused on the employment data and their possible ramifications.

Stocks Tumble on Data, Higher Oil

The three major stock indexes opened in negative territory and never looked back. Implied signs of a slowing economy based on the employment report spurred selling on Wall Street, which was exacerbated a spike in oil prices in the early afternoon. Friday's sell-off erased gains made earlier this week and left the indexes in the loss column for the week.

The Dow Jones Industrials lost almost 100 points and only two of its 30 components closed in positive territory - Boeing and Hewlett Packard, although gains were meager. Verizon was flat on the session and IBM led the Dow in losses with a 2-percent decline. Nine others shed more than 1 percent.

The Nasdaq Composite lost well over 1 percent, with some heavyweight techs taking a beating. Google and eBay fell, and this affected the Internet sector. And Apple slid 4.5 percent due to legal problems regarding iPod batteries. All the technology bellwethers closed in negative territory, with the exception of JDS Uniphase, which was unchanged. Oracle and Sun Microsystems each lost more than 3 percent, and Cisco Systems was down 2.4 percent, followed by IBM. Five other big caps lost more than 1 percent.

At Closing:

The Dow 30 Industrial Index fell 92.52 points or 0.88 percent to end at 10,460.97; the Nasdaq Composite index lost 26.37 points or 1.26 percent to close at 2,071.43, and the benchmark Standard & Poor's 500 Index was down 8.27 points or 0.69 percent to end at 1,196.02.

The 30-year Treasury bond was down 30/32 in price with the yield rising to 4.28 percent.

The 10-year Treasury note was down 22/32 in price with the yield rising to 3.98 percent.

The 5-year Treasury note was down 12/32 in price with the yield rising to 3.73 percent.

AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage was at 5.342 percent from 5.366 percent at Thursday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 4.929 percent from 4.941 percent at Thursday's close.

Coming Up

The week of June 6 has little to offer in the way of economic news, with only the U.S. trade balance for April, May reports on Wholesale Inventories and U.S. Import Price Indexes, and weekly jobless claims due. There are no reports scheduled for Monday or Tuesday, which will leave the markets to dwell on Friday's employment report. This could weigh on the financial markets in the early sessions of next week. Over the weekend and into Monday mortgage rates will likely edge up from today's low levels due to the increase in Treasury yields. But even an uptick in rates will leave them at attractive low levels.

Carolyn Siegel

carolyn@interest.com

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