NEW YORK (AP) - Stocks rose Tuesday after President Barack Obama and Republican leaders agreed to a package of tax cuts and an extension of unemployment benefits. Bond prices fell as traders anticipated rising budget deficits.

The Standard & Poor's 500 index and the Nasdaq composite traded above their closing highs of the year. The yield on the 10-year Treasury note rose to 3.12 percent, its highest level since July 13. Rising bond yields are a reflection of investors turning more bullish on the economy and also worrying about bigger deficits.

The extension of the Bush-era tax cuts, which were due to expire at the end of the year, removed a major source of uncertainty for financial markets.

The deal announced late Monday also included a one-year break on payroll taxes which will put money directly in Americans' pockets. The same is true for the extension of unemployment benefits, which economists see as an effective way to stimulate the economy by getting people spending again.

"The deal in Washington is a big deal," said Kim Caughey Forrest, equity research analyst at Fort Pitt Capital Group. "Investors really do like certainty, and they really do like certainty around taxes."

The Dow Jones industrial average climbed 54.75, or 0.5 percent, to 11,416.94 in midday trading.

The S&P 500 rose 7.08, or 0.6 percent, to 1,230.20. All 10 industry groups that make up the index rose, led by industrial companies. The Nasdaq rose 16.61, or 0.6 percent, to 2,611.53.

Treasury prices fell sharply, sending their yields higher. The yield on the 10-year Treasury note rose to 3.12 percent from 2.93 percent late Monday. The yield on the 10-year note is a widely used benchmark for interest rates on loans including mortgages.

Citigroup Inc. rose 4.2 percent to $4.64 after the government said late Monday it reached a deal to sell its remaining stake in the bank for a $12 billion profit. Nicor Inc. jumped 4.8 percent to $49.02 after the natural gas distributor said it had agreed to be acquired by AGL Resources Inc. for about $2.38 billion in cash and stock.

Shares of New York Times Co. rose 2.5 percent to $9.61 after the newspaper publisher said declines in print advertising sales are slowing and expenses are falling.

Investors were also encouraged by news out of Europe. European stock markets rose after finance ministers from the 16 nations that use the euro did not rule out increasing their $1 trillion bailout fund. Ireland was also expected to pass a budget to reduce its deficit.

Britain's FTSE 100 rose 0.7 percent, while Germany's DAX rose 0.7 percent. France's CAC-40 rose 1.6 percent.

Gold for February delivery fell 0.8 percent to $1,404.30 an ounce. Silver for March delivery rose 0.4 percent to $29.625 an ounce. Crude oil for January delivery fell 1 percent to $88.52 a barrel.

The dollar was flat against an index of six other currencies. It had been down as much as 0.4 percent earlier in the day before recouping its losses by midday.

(Copyright 2010 by The Associated Press. All Rights Reserved.)