Stocks sold off on Wednesday, pressured by a sharp spike higher in Treasury yields as traders grew worried that a new U.S. budget bill would put even more stress on the country's already large deficit.

The Dow Jones Industrial Average lost 816.80 points, or 1.91% to 41,860.44. The S&P 500 shed 1.61% to 5,844.61. The Nasdaq Composite slid 1.41% to 18,872.64.

The 30-year Treasury bond yield last traded around 5.09%, touching the highest level going back to October 2023. The benchmark 10-year Treasury note yield traded at 4.59%.

Long-dated bonds sold off as traders worried a new budget bill would worsen the U.S. deficit. The measure is expected to pass as lawmakers reach a compromise on state and local tax deductions heading into Speaker Mike Johnson's Memorial Day deadline. Yields spiked even higher after a poor afternoon auction for 20-year debt, raising fears investors may be losing their appetite for funding America's deficits.

"The question now is, from a fiscal perspective, what will the tax bill look like, and will it undo all of the recent fiscal frugality by simply raising the debt level at a slower rate of pace? So I think that's why the 10-year yield is moving higher — because investors are worried that we're really not doing anything to slow the pace of inflation and to reduce the debt," Sam Stovall, CFRA Research chief investment strategist, told CNBC in an interview.

"Now it seems as if there is a greater chance that the tax bill will pass, and that could end up simply continuing to raise the overall debt level," he continued.

Treasury yields had spiked last month as worries over President Donald Trump's tariffs dented confidence in the safe haven status of U.S. debt. The 10-year in April swung from below 3.9% to more than 4.5% in just days. Yields eased from those levels after Trump announced delays on when the levies would take effect.

Target shares dropped 5.2% after the big box retailer cut its full-year sales outlook, with executives citing tariff uncertainty and a backlash to the company's pullback in diversity, equity and inclusion efforts. UnitedHealth was the worst-performing Dow member, losing 5.8% following a downgrade from HSBC. Major tech-related stocks Apple and Amazon also dropped as rates increased.

Wednesday's action comes after a tough session for the three major averages. The S&P 500 ended a six-day win streak, while the Nasdaq saw its first negative day in three.

The major averages have staged sharp recoveries since a sell-off last month that engulfed markets after Trump unveiled steep tariffs on imported goods. The S&P 500 and Nasdaq are up more than 13% and 18%, respectively, in the past month.

"Some [investors] are a little worried that we've gone too far, too fast, and are due for some digestion of recent gains," Stovall added.