Updated from 11:26 a.m. EDT

The Treasury market crumbled Friday and the 30-year bond yield breached 5.0% for the first time since 2004, as strong employment gains and sky-high commodity prices fueled inflation fears.

Next week, the market will get a little bit of everything, with readings on the U.S. budget, the trade balance, business inventories and retail sales all on the docket. Capacity utilization and industrial production reports will also be released.

Bond prices caved to worries that economic strength could mean more rate hikes from the Federal Reserve, or that the Fed may even be behind the curve on inflation. The 10-year yield climbed above 4.90% to its highest level since June 2004.

The benchmark 10-year note ended the session down 14/32 to yield 4.96%, while the 30-year bond tumbled 29/32 to yield 5.04%. Bond prices and yields move in opposite directions.

The two-year edged lower 2/32 to yield 4.88% and the five-year fell 7/32 to yield 4.89%.

As economic activity ramps up and inflation expectations rise, most central banks will raise interest rates in order to slow economic growth, by making it more expensive to borrow money. The Fed has raised its benchmark fed funds rate 15 times since June 2004, in an attempt to keep the inflation genie in the bottle. This has brought the fed funds rate to 4.75% from 1.0%.

Interest rate futures show 100% odds that the Fed will lift the rate to 5.0% on May 10, and 44% odds for an increase to 5.25% in June. The market has priced in more certain 84% odds that the rate will hit 5.25% by August.

Market participants are worried about whether the Fed will raise rates too many times and bring the economy to its knees.

Not so, says Frank Bifulco, a private bond investor and former fixed-income strategist at Deutsche Bank.

"Nominal GDP growth is still strong relative to the 10-year Treasury," says Bifulco. "Bottom line, Fed monetary policy is not restrictive enough."

Michael Darda, chief economist at MKM Partners, agrees, adding that investors should sell bonds on any strength "because the fundamentals are terrible."

"If you subtract inflation from bond yields, you see that the real yield is actually very low compared to what's normal throughout history," Darda says. "And if you subtract taxes and take inflation out, yields are barely positive or even negative across entire curve. ... After taxes and inflation, bonds pay nothing or less than nothing."

On the economic front, employers added 211,000 workers to payrolls in March, the Labor Department said Friday, vs. a forecasted 190,000. This makes the first quarter of 2006 the best start to the year for hiring since 2000. Although the number was greater than the consensus estimate, recent strong employment data had ramped up expectations that the number would be strong.

The unemployment rate fell to 4.7% from 4.8% in the previous month and vs. expectations for the rate to hold steady. Hourly earnings edged higher by 0.2% vs. estimates for a 0.3% gain.

Along with the housing market, the employment picture is seen as the key to when the data-dependent Fed will stop raising interest rates. Central bankers have voiced concerns that "wage inflation" could occur if unemployment drops and salaries increase enough to ramp up consumer spending.

"Few great surprises here," says David Ader, U.S. government bond strategist with RBS Greenwich Capital. He called the fall in the unemployment "scary," but was encouraged by the tame hourly earnings number. On net, the report was neutral, he said, but "it certainly keeps a Fed hike on for May," with risks for more increases.

Anthony Crescenzi, chief bond market strategist at Miller Tabak and a RealMoney contributor, agrees. He also contends that Treasury yields almost always trade above the fed funds rate, which is currently at 4.75%. With 5.0% on the table, it seems that the market will see more yield steepening ahead as traders factor in a higher fed funds rate.

Treasuries on all parts of the curve ended the first quarter with an average 1.2% loss, according to Merrill Lynch data, the worst start to a year since 1999.

But Matthew Smith, a portfolio manager at Smith Affiliated Capital, questioned the accuracy of the March payrolls report. He noted that goods-producing industries added 45,000 jobs, including a surprising gain of 41,000 in construction while manufacturing firms cut 1,000 jobs, the first decline since September.

Given that the housing market has been cooling and recent Institute of Supply Management surveys show a strengthening manufacturing sector, Smith says it's odd that construction jobs were added and manufacturing jobs lost.

"The perception that the U.S. economy is a runaway freight train is mistaken -- things are slowing," he says.

Elevated commodity prices have recently fed inflation worries, as policy makers cited rising energy and commodities costs among the reasons they raised rates at the March 28 Federal Open Market Committee meeting.

Gold, which is typically regarded as a hedge against inflation, rose above $600 an ounce for a second session Friday, before ending the day down $7.00 at $592.70. On Thursday, gold breached the key $600 level for the first time since 1981. Gold has risen more than 40% in the past 12 months, compared with an 11% rise in the S&P 500.

Silver prices have touched 22-year highs. Crude prices have jumped about 10% in the past month, tracking back toward the intraday record high at $70.85 reached last August.

Smith also points out that the rise in gold is "a real indicator of dollar decline," and he says that protectionist sentiment in Washington, global trends and scarcity have played into gold's meteoric rise as much as the specter of inflation.

"India and China are seeing a lot of jewelry demand, but it's more than that. China's central bank reserves are about 1.8% in gold, while the average central bank holding is about 8%," says Smith. "They have a lot of buying to do to fill that gap."

In other international developments, news from Japan also weighed on the Treasury market Friday. The yield on the five-year Japanese government bond surged to a record high overnight on growing expectations that the Bank of Japan (BOJ) will raise interest rates as soon as midyear.

A key reason why the U.S. bond market has performed so well in recent years is that it has offered the highest return of debt markets worldwide. Moreover, the market has been fueled by the "carry trade," whereby investors borrowed money in Japan, which held its interest at 0%, and invested it in the U.S. for a higher return.

With rates set to rise in Japan as evidence mounts that the country has won its battle against deflation, there is more of a chance that Japanese investors will borrow and spend within the nation's borders. Japan is the largest foreign holder of Treasuries.

Short-term rates in Japan rose sharply Thursday on news the nation's monetary base posted its first year-over-year decline since January 2001, evidence of tighter monetary conditions

Smith says this worry is overdone. "If you look at rates around the world, ours are still near the highest," Smith said. The fed funds rate stands at 4.75%, the BOJ's key rate is at 0% and the European Central Bank's rate is at 2.50%.

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