T-Bond Yield Falls Below 6% : Markets: The breakthrough low comes in response to a Labor Department report of an unexpected drop in jobs. Stocks also rally.

Treasury bonds, propelled by speculation that interest rates will have to come down again, staged a powerful rally Friday that pushed long-term yields below 6% for the first time.

The rally got under way after the Labor Department reported an unexpected 39,000-job drop in the size of the nation’s non-farm payroll. Private economists had expected the payroll to swell by 150,000 jobs.

By day’s end, the yield on the benchmark 30-year Treasury bond had fallen to 5.94% as the security’s price, which moves in the opposite direction, shot up 1 3/8 points, or $13.75 per $1,000 in face value. The closing yield was a full one-tenth of a percentage point below Thursday’s 6.04%.

Meanwhile, stocks also rallied in the run-up to the long Labor Day weekend, while the signs of economic weakness undermined the dollar’s value against other major currencies.

Disappointment over the payroll figure, a key measure of U.S. economic health, overshadowed a decline in the nation’s unemployment rate to a two-year low of 6.7%.

It also fanned speculation that the Federal Reserve Board will have to cut interest rates to jolt the economy into action.

The bond market’s startling momentum from the economic report left analysts and traders wondering how low the long bond yield will go and how much faster it will decline.

“When something is going 70 miles an hour, it’s kind of hard to say when it will accelerate,” said Steven R. Ricchiuto, chief economist at Barclays de Zoete Wedd Government Securities Inc.

It was the latest in a series of record low yields since the Treasury began regularly auctioning 30-year bonds in 1977.

The Labor Department said non-farm employment fell by 39,000 jobs in August. The news seemed to obliterate any chance that the Fed will raise interest rates in the next few months, a move that could stifle economic growth. Higher rates can depress the value of fixed-income securities such as government bonds.

The supportive news brought fixed-income investors out in droves during the abbreviated pre-holiday session, which closed at 1 p.m.

The federal funds rate, the interest on overnight loans between banks, was 3.063%, unchanged from late Thursday.

Stocks

Wall Street staged its traditional Labor Day rally, with the NASDAQ market extending a record-setting streak into a fifth session Friday.

The Dow Jones industrial average finished with a gain of 7.83 at 3,633.93, paring its deficit for the week to 6.70 points on Big Board volume of 197.16 million shares, down from Thursday’s 259.87 million shares. Advancing issues outnumbered declines by about 8 to 7 on the New York Stock Exchange.

The NASDAQ index ended up 1.06 points at a record 749.71.

Financial markets will be closed Monday for Labor Day.

The unexpectedly poor reading on non-farm payrolls, combined with a decline in the government’s chief gauge of future economic activity, initially put the stock market in a somber mood.

But stocks reversed course when the bond market embarked on its buying binge that sent prices surging and interest rates tumbling.

The Commerce Department reported that its index of leading economic indicators fell 0.1% for July, erasing June’s slight gain and continuing a seesaw pattern that has signaled a sluggish economy since the first of the year.

Falling rates have made interest-sensitive investments such as bonds less rewarding, which has steered money into stocks and helped sustain this summer’s advance on Wall Street.

Among the market highlights:

* St. Jude Medical, a maker of mechanical heart valves, ended down 2 to 29 1/2. An Oppenheimer analyst repeated a neutral rating on the stock, citing concerns about competition.

* Alcoa gained 1 3/8 to 74 3/8, J.P. Morgan rose 1 7/8 to 77 1/4 and Exxon added 1 1/8 to 65 1/2.

* Advanced Micro Devices fell 1 7/8 to 29 1/8 on volume of 4.1 million shares.

* Chrysler lost 3/4 to close at 42 following former Chairman Lee Iacocca’s resignation as a director in the company that gave him a high profile in the corporate world.

* Tootsie Roll Industries lost 3 3/8 to 65, a 52-week low.

Overseas, London’s Financial Times 100-share average closed down 15.3 points at 3,057.3. Setting a new closing high for 1993, Tokyo’s 225-Nikkei average rose 133.01 points to end at 21,116.21. In Frankfurt, the DAX average ended 0.46 point lower at 1,925.16.

Other Markets

The dollar plunged to its lowest closing level against the German mark in nearly three months after the Labor Department’s employment report convinced investors that U.S. interest rates will remain lower than those abroad.

Low U.S. interest rates are considered a stimulus for the domestic economy, but hurt the dollar as investors look to other currencies for higher returns.

The dollar’s decline was exaggerated by the thinness of the market just before the Labor Day weekend.

Investors also sold European currencies and the Japanese yen to buy marks.

In New York, the dollar closed at 1.622 German marks, down from 1.643 on Thursday. It also fell to 104.60 Japanese yen, down from 105.90.

Gold prices were up, closing at $364.50 an ounce, up 90 cents from the day before. Silver fell 4.7% to close at $4.521 an ounce.

Crude oil futures resumed their slide on the New York Mercantile Exchange on new signs of OPEC overproduction, with light, sweet crude oil falling 24 cents to $17.73 a barrel.

Market Roundup, D4