NEW YORK (CNN/Money) - After a morning rally fizzled out, Treasury prices dipped Friday afternoon on a service sector report and jitters by speculators.

The dollar gained against the euro and fell against the yen.

The benchmark 10-year note lost 19/32 of a point to 101-04/32 to yield 3.99 percent; during the morning surge, the yield had touched 3.81 percent.

The 30-year bond fell 23/32 to 116-26/32 to yield 4.29 percent, up from 4.23 percent Thursday. Treasury prices and yields move in opposite directions.

The five-year note declined 10/32 of a point to 100-19/32, yielding 3.74 percent, and the two-year note edged lower to 99-27/32, yielding 3.58 percent.

Treasuries initially spiked up after the government reported Friday that May payrolls grew by only 78,000, well below the 175,000 consensus forecast of economists surveyed by Briefing.com.

The jobs number was the smallest monthly increase since August 2003, when only 2,000 jobs were added, according to revised figures from the Labor Department.

The wide miss was a boon for bond traders, who took it as a sign that inflation is under control and that the Federal Reserve will relax its policy of measured rate increases.

Inflation hurts bonds as it erodes the value of the fixed interest-paying investment.

But by midday, bonds had given back all of those gains and were down from the previous session as traders sold their positions for profit ahead of the weekend.

A report by the Institute for Supply Management showed growth in the service sector for May, even though it fell short of Wall Street expectations. The index -- which considers everything from coffee shops to airlines, fell to 58.5 from 61.7 -- but remained above 50, which indicates a sign of growth.

Also adding to the slide were comments by Federal Reserve Governor Edward Gramlich, who said he was uncertain what stage of rate-hike campaign the central bank is in now.

His remarks, which hinted that the Fed would not alter from its measured pace of interest rate increases, came two days after Dallas Federal Reserve Bank President Richard Fisher said the tightening campaign was in the "eighth inning."

Bonds have been rallying most of the week, with yields on the 10-year falling below 4 percent for the first time in 14 months.

The rally was sparked after the French rejected a referendum on a European Union constitution last weekend, which raised questions about the future of the EU and sent investors scurrying to US markets.

It continued Wednesday, after a key manufacturing report showed slowing industrial growth and inflation well contained.

Reports due out next week include Tuesday's consumer credit figures for April, while Friday brings import/export prices for May and the May federal budget.

In currency trading, the euro was at $1.2229, down from $1.2274 the previous session and near the eight-month low of $1.2210 hit late Wednesday. The dollar traded at ¥107.73, down from ¥108.27 late Thursday.

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