May 27 (Bloomberg) -- U.S. stocks slid as a jump in long- term borrowing costs spurred concern government efforts to reduce interest rates will fail, while Monsanto Co.’s disappointing forecast triggered a drop in commodity producers.

Benchmark indexes erased gains as the 10-year Treasury note declined for a fourth day, sending its yield to a record spread above two-year notes. Wells Fargo & Co. and U.S. Bancorp fell at least 5.6 percent as the Federal Deposit Insurance Corp. said the number of “problem” banks swelled to a 15-year high. Monsanto slid 6.3 percent after the world’s largest seed maker said profit will be at the low end of a previous forecast.

“There’s consternation in the stock market,” said Russ Koesterich, who helps oversee $1.5 trillion as head of investment strategy at Barclays Global Investors in San Francisco. “If we see a pick-up in long-term yields, an economic recovery will be much more difficult. That concern could be enough to halt the recent stock rally.”

The S&P 500 dropped the most in two weeks, losing 1.9 percent to 893.06 at 4:05 p.m. in New York. The Dow Jones Industrial Average sank 173.47 points, or 2.1 percent, to 8,300.02. General Motors Corp. had the biggest drop in both gauges after failing to persuade enough bondholders to exchange debt for equity, pushing the company closer to bankruptcy. Four stocks fell for each rising on the New York Stock Exchange.

Five Out of Six

Today’s tumble erased most of a rally yesterday, when the biggest gain in consumer confidence since 2003 sent the S&P 500 up 2.6 percent and ended a four-day slide. The benchmark gauge of U.S. stocks has fallen for five of the past six sessions, trimming its rebound from a 12-year low in March to 32 percent

A gauge of 16 lenders in the S&P 500 fell 5.3 percent, the steepest retreat among 24 groups, after the FDIC said 305 banks with $220 billion in assets were tagged as “problem” companies as of March 31 as provisions set aside for loan losses weighed on industry earnings.

“The first-quarter results are telling us that the banking industry still faces tremendous challenges, and that going forward asset quality remains a major concern,” FDIC Chairman Sheila Bair said in a statement.

Wells Fargo, the second-biggest U.S. bank by market value, fell 6.1 percent to $24.08. U.S. Bancorp dropped 5.7 percent to $17.96.

‘Real Issues’

“Bair is basically saying that, although capital ratios have improved dramatically, the banking industry has real issues,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “Whenever you say that, the market gets nervous. It indicates that they’re still going to need to raise more capital, that we’re not completely through this financial crisis.”

KeyCorp slumped 8.5 percent to $4.76. Ohio’s second-largest bank filed to issue as many as 106.6 million shares of common stock and exchange them for $1.74 billion in trust preferred securities.

The cost of borrowing dollars for three months between banks rose for a second day after ending a 38-day decline yesterday amid renewed concern some financial institutions aren’t strong enough to weather the financial turmoil. The London interbank offered rate, or Libor, for three-month loans increased one basis point to 0.67 percent.

Yields on Fannie Mae and Freddie Mac mortgage bonds rose for a fourth day after yesterday exceeding where they stood before the Federal Reserve announced it would expand purchases to drive down loan rates. The increase in mortgage-bond yields is driven in part by higher Treasury rates.

‘Getting Destroyed’

Yields on 10-year Treasuries climbed 0.18 percentage point, or 18 basis points, to 3.732 percent. The so-called yield curve -- the difference in yields between two and 10-year notes -- widened to a record 2.75 percentage points. Yields on 10-year notes have risen more than 100 basis points since Fed officials said in March they would buy up to $300 billion of U.S. debt over six months in an effort to reduce rates.

“The U.S. bond market is getting destroyed and that’s why we’ve rolled over,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. “It’s awful for the housing market -- mortgage rates will get higher. It’s awful for anyone who needs to refinance in a highly leveraged economy. Higher interest rates are like kryptonite.”

Bank shares are swinging too much to suggest the U.S. stock market’s 11-week rally will last, according to Macro Risk Advisors LLC.

Bank Stock Volatility

The so-called historical volatility for financial shares in the S&P 500 is 3.67 times the other nine industries in the measure. The calculation is based on prices from the prior two months.

The volatility ratio surged to a record 3.94 two weeks before Lehman Brothers Holdings Inc.’s September bankruptcy. The S&P 500 then slid 41 percent through Nov. 20. It rebounded 24 percent in seven weeks only to fall 28 percent through March 9.

Monsanto lost 6.3 percent to $79.88. Ongoing earnings will be about $4.40 a share this year, the lowest point of its forecasted range of $4.40 to $4.50, because of stronger-than- expected competition in its herbicide business. The company was expected to earn $4.59 a share, according to the average estimate of analysts surveyed by Bloomberg.

General Motors tumbled 20 percent to $1.15 after failing to get 90 percent of its bondholders to swap debt for stock, pushing the company closer to bankruptcy.

Allegheny Technologies Inc. fell 10 percent to $32.15. The specialty-metal producer said it will sell $300 million of senior notes due 2019 and $350 million of convertible notes due 2014.

SanDisk, Symantec

SanDisk Corp. rallied 14 percent to $15.52 for the top gain in the S&P 500 after Samsung Electronics Co. said it renewed a patent-licensing agreement with the maker of flash memory chips. The licensing deal will run until August 2016, Suwon, South Korea-based Samsung said in a regulatory filing.

Symantec Corp. added 2.6 percent to $14.80. Investors should buy call options of the biggest maker of security software to profit from rallies in their shares, according to Goldman Sachs Group Inc. note to clients. Symantec was also raised to “outperform” at Morgan Keegan.

Technology shares in the S&P 500 retreated less than 0.7 percent today, the best performance among 10 groups.

“Technology should be a pretty good sector to be overweight in this sort of environment,” said Eric Teal, who oversees $4 billion as chief investment officer at First Citizens Bank in Raleigh, North Carolina. “It offers the greatest response to an economic recovery. Whenever we get some relief on that front, technology will be a primary beneficiary.”

Growth Predicted

The U.S. economy will begin to expand next quarter, according to 74 percent of economists in a National Association for Business Economics survey. Compared with NABE’s February poll, growth will be slower and unemployment will be higher in the second half of this year and through 2010.

The jump in bond yields erased an earlier gain in builders spurred by a better-than-estimated increase in sales of existing homes. Home resales in the U.S. rose for the second time in three months in April as foreclosure auctions and cheaper prices lured buyers, buttressing the case for an end to the industry’s slump this year.

Purchases increased 2.9 percent to an annual rate of 4.68 million, in line with forecasts, from 4.55 million in March, National Association of Realtors figures showed. The median price slumped 15 percent from a year earlier, the second-biggest drop on record. A separate report indicated that the retreat in home values eased in the first quarter.

D.R. Horton Inc., the largest U.S. homebuilder by market value, fell 2.6 percent to $9.22 after earlier surging 6 percent. Lennar Corp. retreated 4 percent to $9.37 and earlier rose 5.3 percent.

‘Overshot’

“The equity market has overshot the typical rally coming out of a recession,” Barry Knapp, U.S. equity strategist at Barclays Plc in New York, told Bloomberg Television. “We’re going to have to deal with all the headwinds for the consumer and continued deleveraging for the financial sector.”

The U.S. government’s Aaa credit rating is stable “even with a significant deterioration” in the nation’s debt, Moody’s Investors Service said, signaling confidence in a rebound from the recession.

S&P signaled last week that Britain may lose its top credit rating and Pacific Investment Management Co.’s Bill Gross, who helps run the world’s largest bond fund, warned the U.S. may eventually surrender its AAA ranking. A cut would lift borrowing costs for the government, spur inflation and make it harder to curtail the banking crisis that has spurred more than $1 trillion in losses.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.

Last Updated: May 27, 2009 16:44 EDT