Government bond prices rallied Tuesday as disappointing manufacturing data, a plunging stock market and mortgage-related buying sent Treasuries to their best gains in two weeks. Analysts said the stock market could continue to set the tone for Treasuries until Friday, when August payroll data are released.

The yield on the benchmark 10-year note fell below 4% and was at 3.96% at about 4:30 p.m. EDT Tuesday, bringing it to a 39-year low. Its price added 1 13/32. Meanwhile, the five-year note added 29/32 to yield 3%, and the 30-year gained 1 29/32 to yield 4.81%.

Bonds got a boost when the Institute for Supply Management's U.S. factory index came in at a disappointing 50.5 in August, unchanged from July and slightly below economists' expectations. Of particular worry was the new orders index that fell to 49.7, the first contraction in that number since November 2001. It stood at 50.4 in July.

The

Dow Jones Industrial Average

closed down 356 points, to 8307.

"The Treasuries rallied on a flight to quality (from the stock market) and mortgage-related buying," said Kim Rupert, senior economist with Standard & Poor's.

Mortgage-related and so-called "convexity" buying came about because low interest rates led to refinancing and more prepayments. When that happens, portfolios lose mortgages, forcing their managers to rebalance their holdings by duration, Rupert said. Fund managers were buying five- and 10-year notes on Tuesday, she said.

In the absence of other economic news, it's possible bond prices could continue to be a function of the stock market until Friday, when the August employment report is released.

"The payroll is a key piece of data. If the payroll is up, it's positive for the economy and it shows the recovery is coming along, and employers have the confidence to start hiring again," Rupert said. A positive number would weigh on Treasuries but help the stock market, she said.

"A negative payroll number means the recovery is losing stem," Rupert said, adding that in that scenario, she'd expect more flight to quality from stocks to Treasuries.

A dip in payroll numbers would also create more debate as to whether the

Federal Reserve

board should ease rates again when it meets Sept. 24.