The yield on the 10-year Treasury note rose to 2.51 percent from 2.48 percent late Monday, which raises their appeal relative to dividend-paying stocks for investors seeking income.
The S&P 500 rose 18.68 points, or 0.7 percent, to 2,786.24 on Friday to close out its seventh week of gains in the last eight. The loss snapped the index's longest winning streak to start a year since 2010.
The Dow Jones industrial average lost 16 points, or 0.1 percent, to 25,369.
Stocks have been remarkably calm and strong for more than a year. "I think this is going to be a better year for traders because you're going to get some volatility".
Investors have been preparing for a gradual rise in rates, as the Federal Reserve slowly removes the aid it provided the economy following the Great Recession. They'll need to deliver strong profit growth to justify the big moves they've made already.
Treasury yields, meanwhile, rose after a key measure of inflation rose more last month than economists expected. The worry is that a surprise spike in inflation would force central banks to move more quickly on rates than investors expect and upset markets.
The S&P 500 closed at 2,748.2-3-, while the tech-heavy Nasdaq was down ten points to 7,153.5-7.
Bond prices fell. The 10-year Treasury yield rose to 2.59 percent.
A report from Bloomberg News said that China is considering a slowdown or halt to its purchases of Treasurys, which helped push rates higher.
Technology and health care companies posted some of the biggest losses Wednesday.
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High-dividend stocks like real estate companies, utilities and makers of consumer products fell.
On the opposite end were banks, which can make bigger profits from loans when interest rates rise.
In markets overseas, Japan's Nikkei 225 added 0.6 percent, Hong Kong's Hang Seng rose 0.4 percent, and the Shanghai Composite inched up 0.1 percent.
The S&P consumer discretionary index jumped 0.81 percent after an increase in retail sales showed households bought more goods and figures for the prior month were revised higher, suggesting the economy exited 2017 with strong momentum. Home Depot rose 1.6 percent and Walmart rose 1 percent.
Signet Jewelers had the largest loss of the S&P 500 after it reported weaker sales for the holiday season than a year earlier.
BlackRock (BLK.N) rose 3.3 percent.
The dollar fell to 111.35 Japanese yen from 112.61 yen late Tuesday. The euro fell to $1.1922 from $1.1965, and the British pound dipped to $1.3511 from $1.3564.
Gold fell $6.70 to settle at $1,313.70 per ounce, silver dropped 13 cents to $17.01 per ounce, and copper slipped a penny to $3.22 per pound.
Benchmark U.S. crude added 61 cents to settle at $63.57 per barrel. Brent crude, the global standard, gained 61 cents to $69.87 per barrel.