President Barack Obama's tax-cut proposal is taking a toll on Treasurys.

Bond traders expect the plan to create deeper budget deficits. That spurred a spike in yields Tuesday. The 10-year yield jumped from 2.93 percent to 3.11 percent, its highest level since July 13.

In a compromise with Republicans, Obama agreed to extend Bush-era tax cuts for two years. The plan would also extend unemployment benefits and cut payroll taxes for a year.

Appetite was weak for the Treasury's midday auction of $32 billion in three-year notes. Investors bid for 2.9 times the amount offered, the lowest demand for the notes since February.

In other trading, the 30-year bond dropped $2.46. That pushed the yield up to 4.38 percent from 4.24 percent.