U.S. stocks closed mildly lower on Tuesday, recovering from sharp morning losses as investors found some relief from a slight recovery in bonds. (Tweet This)
"Obviously the bond market led action this morning," said Quincy Krosby, market strategist at Prudential Financial. It's a "continuation of the rollercoaster ride we had last week. In the absence of market-moving data the market has been subject to these (bond) swings."
She noted some support from corporate dealmaking.
In an unexpected morning announcement, Verizon is buying AOL for $50 per share or $4.4 billion in cash, with AOL CEO Tim Armstrong continuing to lead the company after it becomes a wholly owned Verizon subsidiary. The Internet firm surged more than 18.6 percent on the news, while Verizon closed down 0.4 percent.
"Typically (deals are) supportive of the market but right now we're fighting some pretty big macro trends," said Art Hogan, chief market strategist at Wunderlich Securities, referring to the global selloff in bonds.
The Dow Jones Industrial Average failed to hold slight gains in afternoon trade after recovering from a 180-point plunge in the open. The Nasdaq also gave up attempts to advance, while the S&P 500 never broke into positive territory and traded just below the flatline.
"The turnaround on the rise up in yields certainly has a positive effect on the loss we saw in equities," said Robert Pavlik, chief market strategist at Boston Private Wealth. "Really the selling (in bonds) is begetting more selling. People know there's a real possibility interest rates are going to move up this year."
"If you're a long-term investor I would not be worried about interest rates because they're not going to be moving sky-high this year," he said.
Yields gave back gains after reaching multi-month highs on Tuesday morning, staying within a range. The benchmark 10-year Treasury bond yield traded near 2.26 percent after touching a 6-month high of 2.366 percent. The 30-year bond yield held near 3.02 percent after reaching a 6-month high of 3.06 percent.
"The bond volatility is going to continue for a while, at least until the next Fed meeting as people try to get their arms around" the timing of a rate hike," said JJ Kinahan, chief strategist at TD Ameritrade.
The rapid decline in yields after touching highs Tuesday morning signaled a peak in the 10-year for some analysts.
MacNeil Curry, global head of technical strategy at Bank of America Merrill Lynch, said he was looking for a top between the 2.305 and 2.328 percent zone on the 10-year yield. "That was the zone we were looking for because it was the top of the channel from the January highs of 2014. This whole downtrend started back in January, a year and a half ago," he said.
In the first of three bond auctions for the week, the Treasury Department auctioned $24 billion of 3-year notes at a high yield of 1 percent. The bid-to-cover ratio, an indicator of demand, was the highest since February.
Crude oil settled up 2.5 percent at $60.75 a barrel on the New York Mercantile Exchange. Oil extended gains on OPEC's forecast for increased demand. The rise came despite Goldman Sachs' morning note that said the rally in oil prices was premature and itself preventing a decrease in oversupply.
Gains in oil pressured the Dow transports, sending the index 1.2 percent lower as all constituent stocks declined.
Marc Chaikin, CEO of Chaikin Analytics, said the decline in transports was "not a major concern" as the S&P 500 continued to hold above a support level of 2,070.
"Futures were way down in the pre-market, pushing us down to support levels and the market's come right back from those levels. I think that's fabulous," he said. "U.S. equities are attractive and will continue to be once we get past this May-June period."
The months mark a lull between quarterly earnings reports and Federal Reserve Open Market Committee meetings.
Earlier, the Dow futures briefly fell about 140 points as yields rose. The U.S. dollar fell about half a percent, with the euro at $1.122.
Analysts said the U.S. bond market movements was mostly triggered by the selloff in German government debt. The 10-year bund yield traded near 0.67 percent, about a 22 percent increase for 2015 but still 13 percent below 6-month highs.
"First of all the European reversal is the focus, but (their bonds have had) extremely low rates and they bounced back to really low rates. Inflation in oil and weakening dollar-euro has helped with that reversal," said Mariann Montagne, senior investment analyst at Gradient Investments.
Greek Prime Minister Alexis Tsipras on Tuesday called on lenders to break an impasse in cash-for-reform talks. Earlier, Greece emptied an emergency IMF holding account to repay 750 million euros ($839 million) due to the international lender, a Greek central bank official said in a Reuters report. The move avoided default but underscored the dire state of the country's finances.
The recent selloff in bonds, which paused last Thursday and Friday, accelerated Monday afternoon and continued into Tuesday's morning trade before slowing again.
Brandon Swensen, co-head of U.S. fixed income at RBC Global Asset Management (U.S.), said the rapid movement was due to "thin markets."
"We think an important story in the bond market in 2015 is a general lack of liquidity which directly exacerbates price swings," he said, noting increased volatility in fixed income since October 2014. "This is largely the result of shrinking dealer inventories as they cope with new regulations on multiple fronts."
Despite the decline in equities, most analysts noted that the major indices remain near records and are confident in the stock market's long-term ability to move higher.
"The shifts on the macro front have investors on edge, but the action has not damaged the bullish technical posture of most equity benchmarks," BTIG's chief technical strategist Katie Stockton said in a note. "We continue to believe the SPX will be able to surmount final resistance on improved intermediate-term momentum. The concern that accompanies down-days has far outweighed the excitement that surrounds up-days, which we see as a positive."
San Francisco Federal Reserve President John Williams said in prepared remarks for a Harvard Club address that raising rates "a bit earlier" allows the Fed to increase rates more gradually.
Jack Ablin, chief investment officer at BMO Private Bank, said the recent gains in bond yields could indicate changing sentiment on rate hike timing. He noted that the 10-year note historically follows GDP and is far below that level.
"Investors may finally be anticipating the long-awaited increase in the Federal funds rate," he said in a note. "Massive liquidity fueled by overly easy central bank policies has pushed a multi-year bond rally to ridiculous levels – and the unwind is only beginning."
Of the little economic data due Tuesday, the Job Openings and Labor Turnover Survey showed job openings down slightly and new hires little changed in March.
The U.S. budget surplus for April was $157 billion, a 47 percent jump from the same period last year, the U.S. Department of the Treasury said.
Earlier on Tuesday, the National Federation of Independent Business said its Small Business Optimism Index rose 1.7 points to 96.9 last month, with owners in the energy field surprisingly bullish about capital expenditure and hiring plans. The increase adds support to views that economic growth is rebounding after a dismal first quarter, Reuters said.
Stocks closed moderately lower on Monday, giving back some of Friday's rally on the April employment report.
The closed down 6.21 points, or 0.29 percent, at 2,099.12, with materials leading eight sectors lower and energy and telecommunications the only advancers.
The Nasdaq closed down 17.38 points, or 0.35 percent, at 4,976.19.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, pared gains to trade near 14.
"A breakdown of technical support level was averted as bond prices reversed course," Peter Cardillo, chief market economist said in a note. "The movement in (the) VIX index remained fairly contained during the early weakness, suggesting support levels remain strong."
Decliners were a step ahead of advancers on the New York Stock Exchange, with an exchange volume of 699 million and a composite volume of 3.1 billion in the close.
Gold futures settled up $9.40 at $1,192.40 an ounce.
In stock news, Castleton Commodities International will buy Morgan Stanley's physical oil business in a long-awaited deal.
The government said MetLife's suit fighting its so-called "SIFI" designation should be dismissed. The insurer earlier this year challenged the decision to designate it as systemically important and subject to tighter scrutiny. The Justice Department said MetLife is "significantly interconnected" with other financial companies.
—Reuters and CNBC's Patti Domm and Peter Schacknow contributed to this report.
On tap this week:
Earnings: Allianz, EnCana, McKesson, Zillow, Voxeljet, Vivint Solar, International Flavors and Fragrances
Earnings: Macy's, Cisco Systems, Shake Shack, Nissan, SAB Miller, Ralph Lauren, Precision Castparts, Markit
8:30 am: Retail sales
8:30 am: Import prices
10:00 am: Business inventories
1:00 pm: $24 billion 10-year note auction
Earnings: Kohl's, Nordstrom, Party City, Applied Materials,Symantec, El Pollo Loco, King Digital
8:30 am: Initial claims
8:30 am: PPI
1:00 pm: $16 billion 30-year bond auction
Earnings: Nippon Telegraph, Petrobras
8:30 am: Empire State survey
9:15 am: Industrial production
10:00 am: Consumer sentiment
4:00 pm: TIC data
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