U.S. Stocks Drop as Bond Yields Rise; Exelon, Wal-Mart Retreat

June 7 (Bloomberg) -- U.S. stocks fell and the Dow Jones Industrial Average posted its worst three-day decline since the February rout after the yield on 10-year Treasury notes rose above 5 percent.

Exelon Corp. and Southern Co. led utilities to the steepest drop in the Standard & Poor's 500 Index as higher bond yields make their dividends less attractive. Wal-Mart Stores Inc., Macy's Inc. and J.C. Penney Co. retreated after May sales trailed estimates.

Stocks extended their fall from a record after benchmark bond yields rose above 5 percent for the first time since August. Rising interest rates may reduce profits and make takeovers more expensive and curb demand for mortgage loans. All 16 homebuilders in S&P indexes declined.

``We're going through an interest rate reality check,'' said James Awad, who oversees about $1.3 billion as chairman of Awad Asset Management in New York. ``That's breaking the momentum of the market.''

The S&P 500 slipped 10.55, or 0.7 percent, to 1506.83 as of 11:56 a.m. in New York. The Dow average retreated 72.65, or 0.5 percent, to 13,393.02. The Nasdaq Composite Index declined 16.66, or 0.6 percent, to 2570.52.

Benchmark 10-year note yields increased 7 basis points, or 0.07 percentage point, to 5.04 percent. Bond yields are increasing worldwide on signs global growth will accelerate.

Traders see a 41 percent chance the Federal Reserve will raise its benchmark rate to 5.5 percent by year-end, compared with no chance a month ago, according to Fed funds futures.

`Spooked'

Exelon, owner of the largest U.S. fleet of nuclear power plants, slipped $1.26 to $71.34. Southern Co., the biggest electricity generator, lost 83 cents to $34.46.

Utilities in the S&P 500 fell 1.7 percent as a group. Collectively, the stocks have a dividend yield of 3.1 percent, the highest among 10 industries in the S&P 500.

``The stock market is going to get a little bit spooked,'' said Larry Smith, who manages about $400 million as chief investment officer at Third Wave Global Investors in Greenwich, Connecticut. ``Treasuries have now reached a point where they are starting to represent good value.''

An measure of expected stock-market swings rose for a fourth straight day. The Chicago Board Options Exchange SPX Volatility Index, or VIX, climbed 7.4 percent to the highest since March 16.

Homebuilders slumped 3.5 percent as a group.

Lennar Corp., the largest U.S. builder by sales, declined $1.23 to $43. D.R. Horton Inc., the second biggest, fell 73 cents to $21.71.

Wal-Mart

Wal-Mart slipped 82 cents to $49.93 today after the world's largest retailer said sales at stores open at least a year, or same-store sales, gained 1.1 percent, on the low end of its forecast for a 1 percent to 2 percent advance.

Macy's, the No. 2 U.S. department-store chain, fell 86 cents to $38.64. Same-store sales declined 3.3 percent, missing analysts' estimates for a drop of 1.4 percent.

J.C. Penney retreated $3.11 to $78.08 after the third- largest U.S. department-store company said same-store sales fell 2 percent. Analysts projected a gain of 0.1 percent, according to Retail Metrics LLC.

U.S. stocks fell yesterday following a government report that showed labor costs rose more than forecast, increasing the odds companies will increase prices and fuel inflation.

Fed Chairman Ben S. Bernanke and Fed Bank of Cleveland President Sandra Pianalto this week warned that prices are rising too quickly.

Economy Watch

In economic data today, the number of Americans filing first-time claims for state unemployment benefits fell unexpectedly last week, pointing to a resilient labor market. Initial jobless claims dropped by 1,000 to 309,000 in the week ended June 2, the Labor Department said today. The four-week average, a less volatile measure, rose to 307,250.

Inventories at U.S. wholesalers rose 0.3 percent in April, in line with forecasts, after a 0.4 percent increase in March, the Commerce Department said. Sales at wholesalers gained 1.3 percent after a 2.1 percent increase. The ratio of inventories to sales matched a record low, a sign wholesalers will stock up on goods to ensure they can meet demand, economists said.

Almost six stocks fell for every one that rose on the New York Stock Exchange. About 619 million shares changed hands, 11 percent more than the same time last week.

U.S. stocks plunged the most in four years on Feb. 27 after a sell-off in China spread globally. The rout wiped more than $3.3 trillion from the market value of equities worldwide.

P&G, McDonald's

Procter & Gamble Co. retreated 64 cents to $62.55. Lehman Brothers lowered its recommendation on shares of the largest U.S. consumer-goods maker to ``equal weight'' from ``overweight,'' citing the potential for a slowdown in revenue and earnings growth.

McDonald's Corp. climbed 17 cents, or 0.3 percent, to $50.81 for the top gain in the Dow industrials. The world's largest restaurant chain may say U.S. same-store sales rose 5 percent in May, more than some analysts' projection of a 4.5 percent gain, RBC Capital Markets said.

ADC Telecommunications Inc. climbed 71 cents, or 4.1 percent, to $18 for the best gain in the S&P 500. The maker of phone-networking gear said second-quarter profit quadrupled on a sale of stock and reported revenue that topped analysts' estimates.