Bank stocks and the broader markets fell Wednesday after a weak auction of Treasury notes.

The KBW Bank Index fell 1.27%, the Dow Jones industrial average 0.27% and the Standard & Poor's 500 index 0.35% after the government sold $19 billion of 10-year Treasury notes for a yield of 3.99%, the highest this year.

"People were a little spooked that the auction did not go as well as anticipated," said Randy Cass, founder and vice chairman of First Coverage, a Boston firm that specializes in tracking investor sentiment based on sell-side research.

Lately, "benefit of doubt" rallies have occurred, Cass said, as investors have chosen to interpret much of the economic news in ways that demonstrate a recovery is beginning. "But when investors get hard, fast results like that bond auction, it's hard to spin that," he said.

Cass added that investors should not expect a sustainable rally in bank stocks for some time.

"Financials may not have seen the worst of it, and we're still seeing a lack of conviction, a lack of belief on the sell side," which is recommending to buy-side analysts "that financial stocks still might not be the place to go," he said.

Investors shrugged off the Federal Reserve's Beige Book report that five of its 12 U.S. regions characterized the economy's "downward trend [a]s showing signs of moderating."

JPMorgan Chase & Co. fell 1.2%, Bank of America Corp. 0.7%, Wells Fargo & Co. 2.9%, PNC Financial Services Group Inc. 5.4% and U.S. Bancorp 0.4%.

Among the regionals, SunTrust Banks Inc. fell 3.2%, Huntington Bancshares Inc. 2.2%, M&T Bank Corp. 2.8% and Regions Financial Corp. 6 cents, to $4 a share.

Citigroup Inc. rose 7 cents, to $3.48, after the New York company said it had begun a series of public exchange offers that, assuming full participation, would let Citi convert $58 billion of preferred stock into common and give the government a 34% stake in the company.

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