Stocks declined, but ended well off their intraday lows, Wednesday after the 10-year Treasury auction, which had a much higher yield than expected.
The Dow Jones Industrial Average ended down just 24.04, or 0.3 percent, to close at 8,739.02, after being down more than 100 points earlier. The S&P 500 and Nasdaq each lost about 0.4 percent.
"It's a little bit of a schizophrenic market," Richard Sparks of Schaeffer's Investment Research told CNBC. "The expectation is ... that we are going to have higher inflation," he said.
"I think, for now, inflation is not on the horizon — I think it could be later on and that's what the market's pricing in," he explained.
The Treasury sold $19 billion of 10-year notes at a yield of 3.99 percent, the high end of expectations, and much higher than the 3.19 percent the Fed paid at the early May auction.
Stocks had opened higher after Home Depot raised its outlook, but those gains quickly faded as a jump in oil prices and sharp rise in lending rates spurred worries about key components of the economic recovery.
Crude oil settled at a seven-month high near $72 a barrelafter a report showed crude inventories shrunk by 4.382 million barrels last week, much more than expected.
Home Depot shares finished just 4 cents higher at $24.39, off earlier highs. The home-improvement retailer raised its outlook, saying it expects earnings to be flat to down 7 percent, compared with the prior projection of a 7-percent drop.
This comes after rival Lowe's raised its outlook last month.
Banks were mostly lower as the market digested news that some of the largest institutions would be repaying government bailout money.
Two of those who won't be giving back their Troubled Asset Relief Protection funds are Bank of America and Citigroup.
Some investors worried that the 10 banks returning TARP money could be doing so too soon and might need further injections later.
Still, Citi shares finished up 2.1 percent after the bank announced a $58 billion stock swap to convert debt into stock, which will make the government the bank's largest shareholder, with a stake of 34 percent.
Bank of America CEO Ken Lewis will be testifying on Capitol Hill Thursday at 10 am ET.
Elsewhere in the financial sector, JPMorgan raised its price target on both Goldman Sachs and Morgan Stanley . Those stocks finished down 1.8 percent and 5.6 percent, respectively.
And Procter & Gamble this morning named Robert McDonald as its new CEO, succeeding A.G. Lafley, as expected.
Techs pulled back as investors took a breather after yesterday's gains, spurred by Texas Instruments raising its outlook.
Google fell 0.7 percent as the Justice Department sent formal demands to publishers, seeking information about their deal with the tech behemoth to make millions of books available online, the Wall Street Journal reported.
In auto land, American depositary shares of Fiat rose 3.6 percent following news that the sale of Chrysler to the Italian automaker is complete.
Shares of General Motors , which now trade on the Pink Sheets, advanced 6 percent.
In the day's economic news, the trade deficit ballooned to $29.16 billion, more than the $28.7 billion expected and the $28.53 logged in March. Exports fell 2.3 percent, while imports fell 1.4 percent.
And mortgage applications fell by 7.2 percentlast week to a four-month low as rising mortgage rates sapped demand.
Meanwhile, the Federal Reserve in its so-called Beige Book report said economic conditions remain weak but there are some signs the worst may be over.
And the government posted a $189.65 billion budget deficitfor May, the eighth-straight month of deficit, well above the $181 billion gap economists had expected.
Trading volume was low, with about 1.22 billion shares changing hands on the New York Stock Exchange. Decliners outpaced advancers roughly 8 to 7.
Still to Come:
THROUGH FRI: Apple developers' conference
THURSDAY: Bank of America CEO Ken Lewis testifies on Capitol Hill; Retail sales; weekly jobless claims; business inventories; Fed's Lockhart speaks; Earnings from Nat Semi
FRIDAY: Import/export prices; consumer sentiment