The Bloomberg News report that China, the world's biggest holder of U.S. Treasuries, could slow or stop buying the government bonds also pushed the U.S. dollar to a more than six-week low against the Japanese yen.
The dollar rose against its Canadian counterpart
The NAFTA news alongside the report on China weighed on U.S. stocks, which have had a strong run so far in the new year. The Nasdaq also broke a six-day string of gains.
"The Chinese are applying pressure to the Treasury market just as the (Federal Reserve) is about to step away from being the buyer of last resort," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
Benchmark 10-year note
The yield curve between two-year notes and 10-year notes
Earlier, Germany's 10-year bond
A combination of factors has pushed global bond yields higher in recent weeks, with global growth and higher oil prices leading investors to speculate that the world's major central banks might withdraw from their stimulus program sooner rather than later.
On Wall Street, the Dow Jones Industrial Average <.DJI> fell 16.67 points, or 0.07 percent, to 25,369.13, the S&P 500 <.SPX> lost 3.06 points, or 0.11 percent, to 2,748.23 and the Nasdaq Composite <.IXIC> dropped 10.01 points, or 0.14 percent, to 7,153.57.
"The market has started on a very strong note this year. Right or wrong, you're hearing an overwhelming bullishness from strategists suggesting that the market momentum move should continue as the year progresses, so you have a lot of money flowing into the market," said David Katz, chief investment officer at Matrix Asset Advisors in New York.
"Today's move was negative. It's the first time basically in a year where people have any concerns about bonds possibly competing with stocks, so that's where you had the early selloff," he said, but the recovery from early lows points to the positive sentiment.
The pan-European FTSEurofirst 300 index <.FTEU3> lost 0.32 percent and MSCI's gauge of stocks across the globe <.MIWD00000PUS> shed 0.05 percent.
In the foreign exchange market, the dollar
The dollar index <.DXY> fell 0.18 percent.
Crude oil prices settled near three-year highs after U.S. government data showed a drop in crude inventories and production, even as fuel inventories rose.
U.S. crude futures
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(Additional reporting by Saqib Iqbal Ahmed and Karen Brettell in New York; Editing by Nick Zieminski and James Dalgleish)
By Caroline Valetkevitch