NEW YORK - Wall Street plunged Tuesday as investors, driving the Dow Jones industrial average down nearly 130 points, grappled with a seemingly relentless rise in bond yields.
It was a fitful trading session that saw stocks tumble, claw their way back and then plummet again when the yield on the 10-year Treasury note soared to a five-year high of 5.295 percent. The climb in bond yields exacerbated jitters about mortgage rates rising, which could hurt the already sluggish housing market, and about the Federal Reserve hiking interest rates, which would slow down corporate dealmaking.
Surging takeover activity had helped boost stocks to record levels until a week ago, when the benchmark 10-year Treasury note's yield passed 5 percent, unnerving stock investors and triggering a selloff.
"It's partially an excuse to take profits, but there are also some legitimate concerns that if bond yields get high enough, they will present an attractive alternative to stocks, and that higher interest rates will reduce private equity activity," said Edward Yardeni, president of Yardeni Research Inc.
The rise in Treasury yields Tuesday was stoked by a tepid reaction to the government's auction of $8 billion in new 10-year notes, and further aggravated by confounding comments from former Federal Reserve Chairman Alan Greenspan, who said he is not worried about foreign governments selling their U.S. Treasury holdings, but added that yields will likely rise in the future.
"I think Greenspan's comments are on both sides of the fence," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc. He added that with quarterly options expiring at the end of this week, the stock market is especially volatile right now.
The Dow Jones industrial average fell 129.95, or 0.97 percent, to 13,295.01. The blue chip index is 381 points, or 2.8 percent, below its record close of 13,676.32, reached June 4.
The broader stock indexes also declined. The Standard & Poor's 500 index fell 16.12, or 1.07 percent, to 1,493.00, while the Nasdaq composite index dropped 22.38, or 0.87 percent, to 2,549.77.
The stock market saw losses in most sectors Tuesday, but homebuilders saw particular weakness as investors worried that Americans could be dissuaded from buying homes; mortgage rates rise alongside the 10-year yield.
Toll Brothers Inc., Centex Corp., KB Home, Pulte Homes Inc. and Lennar Corp. all fell more than 2 percent, while Hovnanian Enterprises Inc. dropped more than 4 percent.
According to Bankrate.com, the average 30-year fixed-rate mortgage was at 6.33 percent Tuesday, up from 6.07 percent a week ago.
Fed funds futures - bets on the Federal Reserve's upcoming interest rate moves - indicated Tuesday that the market expects the central bank to keep rates at 5.25 percent through the end of the year. Before, it had been predicting a bigger chance of a rate cut.
In corporate news, Dean Foods Co., the largest dairy company in the United States, warned that its full-year profit before certain items will miss Street's forecast because of rising raw milk prices and an oversupply of organic milk. The stock fell $1.39, or 4.3 percent, to $31.07.
Texas Instruments Inc., which makes semiconductors used in mobile phones, late Monday narrowed its second-quarter forecast. The stock fell 75 cents, or 2.10 percent, to $35.04.
Continental Airlines Inc. also slumped after analysts cut their earnings expectations for the airline. Continental fell $1.59, or 4.5 percent, to $34.10.
But Lehman Brothers Holdings Inc. reported a stronger-than-expected profit for its second-quarter. Bear Stearns Cos. and Goldman Sachs Group Inc. are expected to report Thursday.
Lehman rose 38 cents to $76.06.
Video game publisher Take-Two Interactive Software Inc. reported weak second-quarter results late Monday, but announced plans to cut costs and received an analyst upgrade. The stock rose 39 cents, or 2.1 percent, to $19.33.
Many analysts are viewing the recent pullback in the stock market as a short-term dip ahead of the second-quarter earnings season, which begins in earnest in July. Yardeni pointed out that with recent estimates of year-over-year earnings averaging about 4 percent, financial results could easily beat expectations as they did in the first quarter.
"We go through these little panic attacks in the market - we had one last year in May and June, we had one this year in March, we may be in the midst of one now. Often these panic attacks turn out to be buying opportunities," Yardeni said.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude futures fell 62 cents to $65.35 a barrel on the New York Mercantile Exchange.
Declining issues outnumbered advancers by about 6 to 1 on the New York Stock Exchange, where consolidated volume came to 2.99 billion shares, up from 2.47 billion shares Monday.
The Russell 2000 index of smaller companies dropped 11.46, or 1.38 percent, at 821.72.
Investors are awaiting retail sales data on Wednesday, the Producer Price Index on Thursday, and the Consumer Price Index on Friday. The PPI and CPI are closely watched inflation gauges.
Overseas, Japan's Nikkei stock average fell 0.41 percent, Britain's FTSE 100 fell 0.72 percent, Germany's DAX index fell 0.36 percent, and France's CAC-40 fell 0.71 percent.