Stocks edge down as interest rates spike

A spike in long-term interest rates rattled investors Tuesday, nudging major U.S. stock indexes lower for the second day in a row.

The market nearly clawed back all the way from an early slump that dragged the Dow Jones industrial average down as much as 180 points in the first half-hour of trading. The price of oil closed above $60 a barrel for just the third time this year, giving a boost to energy stocks.

Traders around the world have been selling off government bonds in recent weeks. That trend accelerated Tuesday, bringing down bond prices and, in turn, driving up the benchmark U.S. bond yield to the highest level since late November. Weakness in bond prices pushes up the cost of borrowing, including mortgages and other loans, which can act as a drag on the economy.

“A dramatic increase in yields brought our market down in the morning, and as the pressure on the bonds eased up the stock market came back,” said David Chalupnik, head of equities at Nuveen Asset Management.

The Dow fell 36.94 points, or 0.2%, to 18,068.23. The Standard & Poor’s 500 index lost 6.21 points, or 0.3%, to 2,099.12. The Nasdaq composite slid 17.38 points, or 0.4%, to 4,976.19. The three indexes are up for the month and year.

The yield on the 10-year Treasury note surged as high as 2.36%. The selling eased by late afternoon and the yield fell to 2.25%, down from 2.28% late Monday. The yield was below 2% as recently as April 28.

“Bonds had been at such lofty prices that a sell-off was somewhat expected,” said Chris Gaffney, president of EverBank World Markets.

Verizon agreed to buy Internet pioneer AOL for about $4.4 billion, a 15% premium to its closing price Monday. Shares in AOL jumped 18.6%. The stock added $7.93 to $50.52. Verizon slipped 18 cents, or 0.4%, to $49.62.

Shares in water and air filter maker Pall vaulted 19.4% on a published report that the company is close to being acquired. The stock added $19.31 to $118.62.

Gap fell $1.51, or 3.8%, to $38.36 after reporting earnings crimped by the strong U.S. dollar.