"We're seeing a continuation of the sell-off of the last couple of days, based on the move up in yields, and particularly with the 10-year bond above 5%," said Mike Malone, trading analyst at Cowen & Co.
Losses accelerated in the last half-hour of trading after-bond guru and PIMCO chief investment officer Bill Gross said global growth will likely keep bond prices under pressure, lifting yields further, over the next three to five years.
Global growth and rising interest rates in Asia and Europe have put the U.S. bond market under pressure, lifting yields to levels last seen nearly a year ago. U.S. economic data, including falling jobless claims and a slight uptick in May retail sales Thursday, further pressured bonds.
Adding to market jitters, crude oil briefly topped $67 a barrel, amid delayed tanker loadings due to a storm in the Persian Gulf.
The Dow industrial fell 198.9 points, or 1.5%, to 13,266.7, its low of the session. All of the Dow's 30 stocks retreated, led by the likes of Exxon Mobil Corp. 3M Co. , Disney , Home Depot Inc. and Pfizer Inc. .
Among blue-chips, Procter & Gamble fell 1.4%. It was downgraded to equal-weight from overweight at Lehman Brothers on concerns over margin growth.
Wal-Mart Stores lost almost 2% after it posted a modest gain in May same-store sales, narrowly missing Wall Street estimates, amid weakness in its apparel and home merchandise. Overall, however, half of those retailers reporting results either met or beat estimates.
The S&P 500 index fell 26.66 points to 1,490.72, while the Nasdaq Composite lost 45.80 points to 2,541.38.
Trading volumes showed 1.907 billion shares exchanging hands on the New York Stock Exchange and 2.388 billion on the Nasdaq stock market. Declining issues topped gainers by 15 to 1 on the NYSE and by 23 to 6 on the Nasdaq.
The negative sentiment could persist until late June, when investors may get relief in the form of advance announcements for the second-quarter earnings season, according to Georges Yared of Yared Investment Research. He characterized the selling as "a not unhealthy correction."
Rising yields, rates
Investors have been warily monitoring rising bond yields since last week. Higher yields make bonds more attractive to investors relative to riskier bets in the stock market.
Better-than-expected economic data, along with hawkish comments by Federal Reserve Chairman Ben Bernanke and other Fed officials have pressured the price of inflation-sensitive bonds, lifting their yields.
On Thursday, the yield of the benchmark 10-year Treasury bond finally topped 5% for the first time since August 2006. The bond fell 1 full point to close at 95 12/32, yielding 5.09%.
At the same time, rising interest rates globally are also putting pressure on stocks.
On Thursday, the New Zealand central bank hiked rates to 8%. The Bank of England, on the other hand, held rates unchanged. On Wednesday, the European Central Bank hiked rates and issued a hawkish outlook.
Correction in the cards?
Market analysts also point to the U.S. market's record-setting rally, which began last summer and drove the Dow and the S&P 500 to record highs, with only a short-lived interruption in late February/early March.
"The overbought condition we've been looking at in the market has persisted for 2-1/2 months," said Marc Pado, market strategist at Cantor Fitzgerald. "Bull markets can produce a few three-month overbought runs, but it typically doesn't last longer than that without some correction back to neutral."
Mixed retail sales
Overall, retailers posted a slight improvement in May sales after bleak reslts in April. But with most retailers having reported, 50% either beat or met estimates, while the other 50% missed, according to Thomson Financial.
J.C. Penney , Macy's , AnnTaylor and Abercrombie & Fitch all reported sales below estimate, while Costco Wholesale , Limited , Nordstrom and Jos. A. Bank Clothiers beat estimates.
Bucking the trend among tech shares, Apple Inc. rose 0.3% after Piper Jaffray raised its price target on the stock to $160 a share from $140, estimating that Apple could sell 45 million iPhones in 2009. Apple will release the iPhone on June 29.
Deals on the backburner
A group of investors including Blackstone Group upped its Biomet offer to $11.4 billion, or $46 a share. The increased offer came as the proxy advisory service Institutional Shareholder Services urged an earlier $44 offer to be rejected.
Dow Jones & Co., rose slightly after Brian Tierney, who led a group of investors that bought the Philadelphia Inquirer and Philadelphia Daily News, told The Wall Street Journal that he could be interested in buying the firm. Dow Jones has received an unsolicited $5 billion offer from News Corp . Dow Jones owns the Journal as well as MarketWatch, the publisher of this report.
PepsiCo and PepsiAmericas agreed to jointly buy 80% of a Ukrainian juice firm, Sandora, for $542 million plus assumed debt. The deal won't affect PepsiCo's earnings but will hurt PepsiAmericas, the companies said.
The dollar advanced against the euro, finding a bid from rising bond yields and fading expectations that the Fed will cut interest rates. But the dollar fell against the yen, catching a bid from the slump in U.S. equities.
Oil futures jumped 1.5%, or 97 cents, to close at $66.93 a barrel, amid delayed tanker loadings as a storm in the Persian Gulf headed toward Iran.
Gold fell, as the specter of higher rates and a higher dollar dampened interest for the precious metal. Gold futures slumped $9.40 cents to close at $665.20 an ounce.
By Nick Godt