The yield on the Treasury's 10-year note passed 5 percent Thursday, rising as high as 5.13 percent in early afternoon trading in New York — its highest point since mid-July. The move unnerved investors who contend the Federal Reserve will be less inclined to cut short-term interest rates.
Stocks also fell as retailers turned in mixed sales results for May. While sales figures improved from the prior month, investors faced some concerns that rising gas prices could cut into consumers' spending money. The array of fresh economic news, which in some cases was positive, didn't halt the selling.
"When this year started, Wall Street and global markets were too enthusiastic that central bank tightening was behind them," said Subodh Kumar, global investment strategist at Subodh Kumar & Assoc., referring to higher interest rates. "I think we're seeing the realization that central banks are not in ease mode. People have been discounting the effect that rising bond yields would have on stocks and their valuations."
The Dow fell 198.94, or 1.48 percent, to 13,266.73, bringing its three-day loss to more than 400 points.
Broader stock indicators also fell. The Standard & Poor's 500 index fell 26.66, or 1.76 percent, to 1,490.72, and the Nasdaq composite index fell 45.80, or 1.77 percent, to 2,541.38.
For the week, following only modest moves Monday and then three declining sessions, the Dow is down 2.94 percent, while the S&P 500 is off 2.97 percent and the Nasdaq is down 2.78 percent.
Bonds fell sharply, with the yield on the benchmark 10-year Treasury note jumping to 5.12 percent from 4.97 percent late Wednesday. The dollar was mixed against other major currencies, while gold prices fell sharply.
Interest rate moves abroad contributed to the declines in the U.S. credit markets. On Thursday, the Bank of England decided to leave its benchmark rate steady after New Zealand's central bank surprised markets by raising its rate to a record high 8 percent from 7.75 percent to curb inflation. On Wednesday, the European Central Bank raised its own rate as well.
Light, sweet crude rose 97 cents to $66.93 per barrel on the New York Mercantile Exchange amid concerns that U.S. refineries aren't keeping pace with demand.
Thursday brought new economic data that did little to deter stocks' downward slide. The Commerce Department said inventories among U.S. wholesalers rose 0.03 percent in April to a seasonally adjusted $394.54 billion after increasing a revised 0.4 percent in March. The March increase had been pegged at 0.3 percent.
Also, a dip in applications for unemployment benefits last week, which indicates a healthy labor market, also made a rate cut seem less likely.
But interest rates held investors' attention Thursday after two sessions in which unease over inflation helped push stocks lower. Investors are concerned that the Fed, which has stood pat on interest rates in recent meetings, could raise them to combat inflation.
Some observers saw the concerns about interest rates as overblown.
"Historically, we're at lows," said Michael Church, portfolio manager at Church Capital Management, referring to interest rates. "I don't think 5 percent is some sort of hard and fast number where this market turns. I don't think 5 percent is going to compel people to take money out of equities."
"Everyone seems to like to focus on this 5 percent level. I think it's in many ways mythical. Five percent is really not that high of an interest rate."
He contends that after the run-up in stocks that began in the second half of last year and accelerated in recent weeks, Wall Street was due for some retrenchment.
"I would be concerned if we didn't have some profit-taking and some mild pullbacks here and there."
In corporate news, Wal-Mart Stores Inc.'s May same-store sales, or sales at stores open at least a year, rose 1.1 percent as the world's largest retailer saw an increase at its Sam's Club warehouse division lend a boost to overall results. Wal-Mart, one of the 30 components of the Dow industrials, fell 99 cents to $49.76.
Target Corp. fell $1.57, or 2.5 percent, to $62.53 after reporting sales that fell short of Wall Street's forecast, though the company said sales met its expectations.
Saks Inc. jumped $1.10, or 5.8 percent, to $20.12 after the luxury retailer posted stronger-than-expected sales.
Apple Inc. jumped 43 cents to $124.07 after an analyst predicted the company, which is scheduled to release a multifunction mobile phone at the end of the month, could sell 45 million of the iPhone devices in 2009 and raised his price target on the stock. The shares hit an all-time high of $127.61.
Biomet Inc. rose $1.36, or 3.1 percent, to $45.56 after a private equity consortium increased its bid for the maker of orthopedic products and the company urged shareholders to accept the sweetened offer.
The Russell 2000 index of smaller companies fell 15.89, or 1.89 percent, to 825.32.
Declining issues outnumbered advancers by about 10 to 1 on the New York Stock Exchange, where volume came to a heavy 1.91 billion shares compared with 1.55 billion traded Wednesday.
In overseas trading, China's benchmark Shanghai Composite Index rose 3 percent, while Japan's Nikkei stock average rose 0.07 percent. Britain's FTSE 100 closed down 0.27 percent, Germany's DAX index fell 1.44 percent, and France's CAC-40 fell 1.46 percent.