The yield on the benchmark 10-year Treasury bond backed off an overnight high of 5.25%, taking some pressure off stocks. An improvement in the April trade deficit helped boost the dollar, in turn benefiting the value of bonds. The yield ended the session at 5.116%.
"We've been tracking the bond market over the last couple of days," said Kevin Kruszenski, head of trading at KeyBanc Capital. "The selling [in bonds] got overdone and buyers like a yield north of 5%," he said.
The Dow Jones Industrial Average gained almost 158 points to 13,424, with all but two of its 30 component stocks advancing. There were strong gains for Alcoa Inc. , General Motors Corp. and Honeywell Inc. . But the Dow still suffered a 1.8% weekly loss.
Also among the blue chips, shares of McDonald's Corp. gained 2.3% after saying global same-store sales rose 8.7% in May.
Meanwhile, the S&P 500 index advanced nearly 17 points to 1,507, and the Nasdaq Composite rose about 32 points to 2,573. For the week, the S&P 500 lost 1.9% and the Nasdaq fell 1.5%.
Tech shares received a lift from the chip sector. National Semiconductor jumped 14.7%, reaching an all-time high, after the company posted a smaller-than-expected drop in profit and said it was buying back $2 billion worth of shares. UBS upgraded the stock to buy from neutral.
Trading volumes showed 1.231 billion shares changing hands on the New York Stock Exchange and 1.554 billion trading on the Nasdaq stock market. Advancing shares outpaced decliners by more than 2 to 1 on the NYSE, while gainers topped decliners by 9 to 5 on the Nasdaq.
By sector, semiconductors were among the top gainers, along with airlines and broker/dealers . Oil and natural gas and pharmaceuticals were flat to mildly higher.
"The major market averages have now pulled back about 3% and are entering that target range for a typical summertime pullback of between 3% and 5%," said Marc Pado, market strategist at Cantor Fitzgerald.
"Obviously, the rocketing bond yields are disconcerting, but we are only now reaching technical support," he said. "It is possible that, once we digest the global market reaction to our sell-off, we could see an attempt at a little Friday bounce."
The benchmark 10-year Treasury note closed up 5/32 at 95-8/32, yielding 5.116%. Overnight it rose to a high of 5.25%.
But news that the U.S. trade deficit narrowed by 6.2% in April to $58.5 billion helped boost the dollar, which in turn bolsters the attractiveness of U.S. assets such as stocks and bonds for overseas investors.
This was the largest improvement since last October in the trade gap, which came in comfortably below the consensus forecast among Wall Street economists calling for a deficit of $63.5 billion.
The improvement in the deficit should boost second-quarter gross domestic product, economists said, although two months of trade data remain to assess.
Also helping bonds come off highs, Chicago Federal Reserve President Michael Moskow said on business news channel CNBC that he believes inflation expectations remain well contained, signaling that the bond market is appropriately priced.
The dollar rose sharply against the euro and was also gaining against the yen following the trade data.
Crude oil futures dropped $2.17 to $64.76 a barrel.
Gold futures fell $14.90 to $6503.0 an ounce.
By Nick Godt