The bond market was smacked down again today, ending what's been an all-around lousy week for the fixed-income market.

Today's

employment report

, which showed the unemployment rate had fallen to 3.9% for the first time in over 30 years, was the catalyst for the selling, as traders increasingly adjust to the notion of a 50-basis-point hike by the

Federal Reserve

.

The unemployment rate -- falling for the first time since January 1970 below 4% -- the

Labor Department

said. A total of 340,000 people were added to the payrolls in the month of April. Average hourly earnings increased 0.4%, in line with expectations. Bonds, which were up prior to the 8:30 a.m. EDT release, fell immediately after.

The drop in the unemployment rate supports the growing sentiment that the

Federal Reserve

will raise interest rates by 50 basis points at its May 16 meeting, rather than the more usual 25-point hike. The May fed funds futures contract, traded on the

Chicago Board of Trade

, are now discounting an 82% chance of a 50-point hike. September contract is now discounting a 40% chance that the Fed will raise rates a full percentage point by the beginning of that month.

Bonds, as one would expect, didn't hold up well. The short end of the yield curve, such as the two-year note, was also bad, and it's been adjusting all week for the prospect of higher interest rates.

The 10-year Treasury bond was lately down 16/32 to 99 31/32, bumping the yield up 6.7 basis points to 6.50%, highest since Feb. 18. The two-year note lost 2/32 to 99 5/32, boosting the yield 17.2 basis points to 6.828%, highest since March 10, 1995. The five-year note was down 8/32 to 96 19/32, boosting the yield to 6.762%, highest since April 28, 1997.

"I believe we're going to see 50," said Richard Schwartz, senior vice president at

New York Life Asset Management

, who nevertheless was optimistic, taking the long-term point of view. "With the higher rates we currently have at some point we're going to see some slowing...at this point, it's a reasonable time to buy a few."

Economists responded en masse to the drop in the unemployment rate. Whereas about one-third of the 29 primary dealers were figuring on a 50-basis-point hike in the funds rate on April 27, now economists at all but three of the 29 primary dealers are betting on that half-point increase.

The

Federal Reserve

has been worried that the decline in the pool of available workers will result in a strong rise in wage inflation, as employers scramble to keep workers at their respective companies. Wage pressures, after remaining largely in check during the last couple of years, are beginning to intensify, evidenced by the recent surge in costs measured in the

Employment Cost Index

.

"To date, they've had a gradualist policy. The question is, do they need to speed it up a bit?" said Mickey Levy, chief economist at

Banc of America Securities

. "If you look at the fed funds futures and the way interest rates have backed up, the market has given Fed almost a free one to move 50, and I'd call it a much higher than 50-50 chance."

The 340,000 increase in nonfarm payrolls was less than the expected 358,000 estimate as forecast by

Reuters

. March's figure was revised upward to 458,000 from 416,000. Economists as forecast by

Reuters

expected a decline in the unemployment rate to 4.0%, after March's unrevised figure of 4.1%.

Census workers actually were less important to the overall increase than expected. Excluding census workers, nonfarm payrolls increased 267,000, Labor said. That was stronger-than-expected -- many economists estimated that this month's payroll increase would include about 100,000 to 150,000 census workers.

Average hourly earnings rose 6 cents to $13.64, after March's figure was revised downward to $13.58. On a year-over-year rate, average hourly earnings are rising at a 3.8% rate, compared with 3.7% at this time last year, and that increase is generally in line with the trend of the last couple years.

The average workweek was 34.6 hours per week, compared with March's 34.5 hours per week and a 34.5 hour per week estimate.

Currency and Commodities

The dollar rose against the yen and declined against the euro. It lately was worth 108.52 yen, down from 108.14. The euro was worth $0.8975, down from $0.8905. For more on currencies, see

TSC's

Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

rose to $27.35 a barrel from $26.78.

The

Bridge Commodity Research Bureau Index

fell to 216.21 from 216.54.

Gold for June delivery at the

Comex

fell to $280.3 an ounce from $281.2 yesterday.