The S&P 500 hit a two-year intraday high after U.S. President Barack Obama forged the deal with Republicans to renew Bush-era tax cuts.
But the rally fizzled late as the yield on the 10-year note hit its highest level since June and debt prices fell sharply.
"The smashing that (bonds) are taking today is disconcerting," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
"The spike in interest rates could be enough to stop the equity rally in its tracks."
The rise in yields added to anxiety from news the U.S. Securities and Exchange Commission has issued more than a dozen subpoenas in its investigation of insider trading on Wall Street, potentially undermining public confidence in the markets.
Optimism over the tax agreement sent the S&P 500 to a new intraday two-year high and above a key technical measure, but the index retreated, confirming the 1,228 level remains a strong resistance point.
Analysts said the lofty heights recently attained by stock indexes may have also given investors reason to pause due to skittishness.
"The market has had a nice run. Investors are a little nervous about the move we just had and are looking for any type of reason to sell off," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.
Still, he noted the pullback could signal additional room for a move higher in equities.
Dow Jones Industrial Average
(DJI: ^DJI )| Index Value: | 11,359.16 |
|---|---|
| Trade Time: | 4:02PM EST |
| Change: |  3.03 (0.03%) |
| Prev Close: | 11,362.19 |
|---|---|
| Open: | 11,363.85 |
| Day's Range: | 11,354.09 -11,450.89 |
| 52wk Range: | 9,596.04 -11,507.30 |
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