FINANCIAL MARKETS : Employment Report Sends Bond Yields Tumbling : Markets: Sharp decline leads to best one-week rally in nearly six years. Stocks are mixed as Dow index loses 16.

In a spectacular rally, bond yields plummeted for a third consecutive session on Friday, as the weak April employment report cemented belief that the economy is slowing dramatically.

A stampede of buying drove the yield on the benchmark 30-year Treasury bond down to 7.02% by day’s end, off from 7.16% on Thursday and the lowest close since 6.97% on March 28, 1994.

Over the past week alone, the T-bond yield has dropped nearly a third of a percentage point, and the decline has been even more dramatic for some shorter-term bonds.

But on Wall Street, the previously hot stock market turned cautious on Friday despite the collapse in bond yields. Some investors dumped shares of industrial companies, fearful that the economy’s pace may now have decelerated too sharply, threatening corporate profits.

The Dow Jones industrial average eased 16.26 points to 4,343.40, though winners still outnumbered losers on the New York Stock Exchange by 12 to 10.

The action in stocks seemed a minor sideshow to the euphoria in the bond market.

Investors who had avoided locking in yields this year--worried that the Federal Reserve Board still had one or more credit-tightening moves planned to guarantee an economic slowdown--have been pouring into bonds since Wednesday.

“Anyone who was saying the economy wasn’t weakening has been forced to become a true believer,” said Colleen Ambrose, money manager at Harris Investment Management in Chicago, which has $16 billion under management.

The buying has been panicked across virtually the entire spectrum of Treasury securities. The yield on five-year Treasury notes, for example, has slumped from 6.82% on Tuesday to 6.44% by Friday’s close as investors have clamored to buy.

Likewise, the six-month T-bill yield, at 5.87% Friday, is down from 6.09% on Monday.

Overall, traders said bonds had their biggest one-week rally in almost six years. The jump in bond prices, on top of gains realized over the past four months as yields have trended lower, has gone a long way toward restoring losses bond holders suffered as interest rates surged last year.

Now, some analysts say the market’s focus has shifted to how quickly the Fed might begin to cut short-term interest rates to keep the economy from sinking into recession.

“The question is not ‘Will we get a slowdown,’ but ‘How severe will the slowdown be?’ ” said Denny Niedringhaus, who manages $150 million of bonds at Southwest Bank of St. Louis.

Bonds will still face some tests in the near term, including next week’s government reports on April inflation.

Also, the dollar--which stayed remarkably firm on Friday and all week--could be pressured next week in the wake of collapsing U.S.-Japan trade talks.

But if inflation stays subdued, “There is room for yields to move significantly lower,” possibly dropping to 6.5% on the 30-year T-bond by the end of the year, said Anders Ekernas, who manages $490 million in bonds at ABB Investment Management in Stamford, Conn.

Meanwhile, stocks ended a busy session mixed, with most key indexes at moderately lower levels as investors pondered the pros and cons of a decelerating economy.

The Dow, which had soared 44.27 points on Wednesday on earlier weak economic data, bounced around for much of Friday in a fairly narrow range.

For the week the blue-chip index gained 22.13 points.

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Among broader indexes, the NYSE’s composite index eased 0.01 point to 279.90 Friday while the Standard & Poor’s 500 index was off 0.42 point to 520.12. The Nasdaq composite lost 3.22 points to 843.53.

The economy’s first loss of jobs in more than two years signals the welcome possibility of even lower interest rates, a plus for stocks. At the same time, it poses the prospect of weaker corporate earnings, which have been robust in recent quarters as the economy boomed.

Some analysts says stocks are primed for profit-taking in the short-term, given their tremendous gains so far this year.

Among Friday’s highlights:

* The heaviest selling was in stocks of industrial issues most likely to be affected by a slower economy. Within the Dow, Alcoa dropped 2 1/4 to 41 5/8, International Paper sank 2 1/2 to 76 3/8 and Caterpillar was off 5/8 to 55 3/4.

Other industrial issues falling included Scott Paper, off 1 1/4 to 88 1/8; Deere, down 2 to 82 1/2, and Phelps Dodge, down 1 to 55 1/8.

* Transportation stocks, which also tend to perform poorly during tougher economic times, were down sharply. The Dow transportation average sank 27.95 points or 1.7% to 1,624.10.

Burlington Northern dropped 1 3/4 to 56 1/8, Delta Air Lines was off 1 3/8 to 63 and Southwest Airlines retreated 3/4 to 21 7/8.

* On the plus side, financial and utility stocks surged as bond yields fell. The Dow utility index jumped 2.17 points to 196.28. Among banks, Citicorp gained 7/8 to 49 1/2, H.F. Ahmanson surged 1 3/4 to 23 3/8 and BankAmerica added 3/4 to 50 1/2.

Many home builders’ stocks also jumped as rates fell. Kaufman & Broad added 7/8 to 14 1/4 and Centex soared 1 1/2 to 26 1/2.

* Some classic “all-weather” growth stocks continued to advance. Gillette gained 7/8 to 84 3/4, Coca-Cola added 1/2 to 59 1/2 and Merck was up 1/4 to 44 1/2.

Overseas, Frankfurt’s 30-share DAX average lost 20.96 points to end at 2,023.83. London’s Financial Times 100-share average closed at 3,251.7, off 12.6 points. The Japanese and Mexican markets were closed for holidays.