Treasury market prices tumbled more than two points Friday as robust gains in April employment indicated that the U.S. economy continued to grow at the start of the second quarter.

Additional selling occurred after the Federal Reserve failed to tighten credit in response to the strong jobs figures, despite widespread speculation that the report would surely prompt the central bank to change policy.

The yield on the Treasury's 30-year bond rose to the highest level since December 3, 1992.

The bench-mark issue closed down more than 2 1/8 points to yield 7.53%.

Nonfarm jobs rose 267,000 in April, higher than most market forecasts. March nonfarm jobs were revised up to 464,000 from an originally reported 456,000, while most analysts had been expecting a downward revision.

Prices of government securities plunged on the figures, causing a flattening trend in the yield curve. Players said a flatter yield curve Friday suggested that the market was gearing up for another tightening in monetary policy.

Fixed-income observers generally agreed that broadbased strength in the employment report, coupled with lingering fears about the dollar and signs that U.S. economic fundamentals remain solid, placed pressure on the Fed to boost credit once again.

But the U.S. central bank left rates unchanged Friday, sending shockwaves through the fixed-income markets and exacerbating selling pressures initially caused by the strong economic statistics.

"There is no reason why the Fed should not have moved after the jobs report, and the market sent the message to policymakers," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc.

Many market observers began speculating about a Fed tightening Friday morning. They were mixed on how aggressively the Fed would act, but most agreed that the federal funds rate will soon be at 4% or 4.25%. Participants also reported a growing belief that the next change in the funds rate will come with a 50-basis-point increase in the discount rate.

Most market observers previously expected the Fed to increase interest rates at the May 17 Federal Open Market Committee meeting.

Failure by the central bank to raise short-term interest rates Friday sent bond investors scrambling to unload Treasuries securities in fear that strong growth in the economy would ignite inflation and lead to further losses on their fixed-income investments.

Observers said this uncertainty will continue to put market professionals on the defensive this week and prompt potential buyers to reevaluate their investment strategies.

Still, there is a chance the Fed will boost interest rates today, according to Elias Bikhazi, money market economist at Deutsche Bank Securities Corp. Like many economists, he believes the central bank will intervene in the money markets to raise the federal funds rate 25 basis points to 4% along with a 50 basis point increase in the discount rates this morning.

"The Fed will tighten because the market has already taken them there and because they'll want to get it out of the way before the refunding," Bikhazi said. "By tightening Monday, dealers can bid on the auctions in a less uncertain environment."

The Treasury Department is slated to sell $17 billion of three-year notes tomorrow and $11 billion of 10-year notes Wednesday as part of its quarterly refunding package.

Still, other market observers do not expect the Fed to tighten credit this week because policymakers do not want to sent the message to the market that they are focusing on the employment report as a barometer of economic activity.

"As the Fed tries to move to neutrality, they don't want to tighten after one number because the market could interpret they're panicking," said Steven Ricchiuto, chief economist at Barclays de Zoete Wedd Securities Inc.

Some market players are predicting that when the Fed finally does tighten again, the fixed-income markets will rebound. However, most agree that a modest bounce in prices is likely, but a sustained bound or turnaround in market sentiment is unlikely, particularly if the Fed only raises the funds rate by 25 basis points.

"A tightening of only a quarter point on the funds rate would hurt the Fed's credibility and leave the market hanging," a market strategist said.

"There's no question the Fed needs to tighten. The employment numbers indicate that the economy remains on a solid growth track and should cause much concern among Fed policymakers."

John E. Silvia, chief economist for Kemper Mutual Funds, said recent economic statistics suggest the economy is growing above trend, noting that capacity utilization suggests that inflation is biased upward. "Expectations of inflation, rather than current credit market development, appear to be the driving force behind the rise in rates," Silvia said.

Although current inflation remains modest, commodity prices, however, have turned upward, he said, noting that the Dow Jones Futures Commodity Index does not tend to lead or be coincident with the 10-year Treasury rate. "Right now, the upturn in this commodity index is a strong negative signal to the bond market," Silvia said.

The Fed is now more likely to raise the federal funds and discounts rates by 50 basis points this month rather than the 25 basis points that was already discounted in the market place, he said.

This week's gamut of economic reports include the much-awaited inflation series, which will provide bond investors with their first comprehensive look at price pressures in the economy for April.

Economists polled by The Bond Buyer generally expect the overall producer price index to increase by 0.2% in April, with the core rate also rising by 0.2%. Forecasts for the consumer price index center on 0.2% increases for the overall report and for the core rate.

In futures, the June bond contract ended down more than two points at 102.15.

In the cash markets, the 5 1/2 0/0 two-year note was quoted late Friday down 14/32 at 98.27-98.28 to yield 6.11%. The 6 1/2 0/0 five-year note ended down a point at 98.01-98.03 to yield 6.95%. The 5 7/8 0/0 10-year note was down 1 1/2 points at 89.24-89.28 to yield 7.34%, and the 6 1/4 0/0 30-year bond was down 2 1/8 points at 84.23-84.27 to yield 7.53%.

The three-month Treasury bill was up 14 basis points at 4.25%. The six-month bill was up 18 basis points at 4.78%, and the year bill was up 17 basis points at 5.39%.

Corporate Securities

Stronger-than-expected employment figures dissuaded corporate treasurers from bringing new debt to market Friday. No issues were priced in the primary market.

New issue volume was moderate at best last week as few underwriters were willing to test the waters of the primary market amid rough seas in the Treasury market.

"Rates continue to experience a high level of volatility, and people are generally willing to keep offerings on the shelves until conditions improve," a syndicate source said.

For example, several planned junk bond offerings were pulled or postponed as issuers feared worsening market conditions and tepid interest from retail buyers.

Rating News

Standard & Poor's Corp. said it upgraded Hertz Corp.'s senior unsecured debt to A-minus from BBB-plus, subordinated debt to BBB-plus from BBB, and the commercial paper to A-1 from A-2.

About $2.4 billion of rated debt is affected.

The action reflects Ford Motor Co.'s recent purchase of both Volvo AB's 26% and Hertz management's 20% stakes in Hertz, Standard & Poor's said. As a result, Hertz is now 100% owned by Ford, the agency said. Hertz will continue to operate as an independent, wholly owned subsidiary of Ford, Standard & Poor's said. And Ford's increased equity stake enhances Hertz's financial flexibility, the rating agency said.

Standard & Poor's said it has always given Hertz additional credit support for the Ford relationship. And Ford's decision to purchase the remaining shares serves to validate and reinforce that position, the rating agency said.

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