The S&P 500 closed at 2,711.45 for a loss of -18.68 points or -0.68%. The Dow lost 0.8 percent to 24,706.41. The drop pulled the 30-company average to a slight loss for the year.
Small-company stocks held up better than the rest of the market.
Other notable index closes included the S&P 400 Mid-Cap Index at 1,930.67 for a loss of -4.56 points or -0.24%; the S&P 100 at 1,192.81 for a loss of -9.25 points or -0.77%; the Russell 3000 at 1,609.65 for a loss of -9.76 points or -0.60%; the Russell 1000 at 1,503.91 for a loss of -9.88 points or -0.65%; and the Dow Jones U.S. Select Dividend Index at 692.46 for a loss of -1.80 points or -0.26%.
"A combination of firm growth and higher interest rates is unnerving", said Anthony Chan, chief economist for Chase in NY. "A creeping up of these things continues to keep the market nervous".
The market had rallied early Monday on hopes that trade tensions were easing between the USA and China.
The big news overnight is that the 10 year Treasury yield has broken above its highs from early 2014, and now sits at 3.08%.
Banks, which stand to prosper because of higher interest rates on loans, bucked the downward trend.
The yield curve steepened from near its flattest levels since 2007, with the spread between the 2 year and 10 year bond yields widening 5bps to 50bps.
The Federal Reserve has signaled that it will raise rates twice more this year, after having done so initially in March, and most economists foresee the next increase in June.
The market now prices a near 40% chance of an additional third hike this year by the Fed and sees the Fed funds rate above 2.75% at the end of 2019. Essex Property Trust fell 3.4 percent to $233.78. Higher mortgage rates can make it harder for would-be buyers to purchase a home.
Some banks got a boost from the higher rates, which make loans more profitable.
Core April retail sales - which excludes gasoline, automobiles, building materials and food services - rose at a brisker 0.4 percent monthly pace over March, as consumer spending is quickening its pace after a first-quarter slowdown.
Home Depot Inc (HD.N) shares slipped 1.6 percent after the home improvement retailer missed sales forecasts as the long winter put a damper on demand for spring products. Chip maker Nvidia fell 3.8 percent; drug maker Celgene slid 3.9 percent.
ENERGY: Benchmark U.S. crude oil gained 59 cents to $71.55 a barrel in electronic trading on the New York Mercantile Exchange. Brent crude, used to price worldwide oil, added shed 8 cents to $78.35 a barrel in London.
CURRENCIES: The dollar rose to 109.97 yen from 109.53 yen late Monday.
The greenback's gains weighed on precious metals prices. Natural gas dipped a penny to $2.84 per 1,000 cubic feet. The Shanghai Composite index dropped 0.3 percent to 3,183.28 and shares in Southeast Asia were lower while Taiwan advanced.