The big talk in Washington and on Wall Street is the proposed deal on an extension of the Bush tax cuts. Although the deal, worked out by President Obama and Republican leaders in Congress, hasn’t yet been made official, the details of the plan most likely will adhere to the key provisions that the president announced on Monday.

Here’s a quick rundown of the various terms of the tax deal:

• A temporary, two-year extension of the Bush tax cuts for all income levels, including for those families that make more than $250,000 per year.
• An extension of the 15% tax rates for long-term capital gains and qualified dividends.
• A resumption of the estate tax to a rate of 35%, including an exclusion on the first $5 million. The estate tax was set to rise to a rate of 55% with an exclusion only on the first $1 million.
• A one-year, two percentage-point reduction in Social Security withholding taxes (FICA).
• A 13-month extension of emergency unemployment benefits.

Now, there’s been a lot of banter from the extreme wings of both parties, with liberal Democrats saying the president sold out on the issue of making the so-called rich pay more. Those on the right think that the temporary nature of the tax cuts, as well as the increase in unemployment benefits, will hamper future decision making and will cause even bigger deficits in the coming year (count me in with this group).

Certainly, the argument about a bigger deficit next year has been confirmed by the bond market. Long-term Treasury bond yields surged right after the agreement was announced. Why? Well, by some estimates, the deal is going to add north of $900 billion to the federal deficit. That increased deficit is bad for both Treasury bonds and municipal bonds and, hence, the spike in bond yields.

Just take a look here at the one-month chart of the 30-Year T-Bond Yield ($TYX). As you can see, yields spiked immediately following the president’s Dec. 6 announcement of the tax deal. The realization that this deal is very likely to be made official pushed yields even higher in today’s trading.

The prospect of bigger and bigger budget deficits going forward should be nothing new to Alert readers. For months now, we’ve been telling you about the tremendous amount of borrowing that’s going to be needed by sovereign governments around the world -- including the United States -- just to stay afloat in 2011. Some estimates peg that number at an incredible $10.2 trillion. Those are debt levels not seen since World War II.

This tax deal isn’t going to help that deficit at all, and bond traders know it. According to economists at JP Morgan, there likely will be a $1.5-trillion shortfall for the current fiscal year, up from their previous $1.2-trillion forecast. For fiscal 2012, their projection is up to $1.2 trillion, from $1.1 trillion, as the two-point cut in payroll taxes gets reversed.

What all this means is that the Treasury is going to have to sell more securities to fund those larger deficits, and that means bond yields (i.e., long-term interest rates) will continue to rise.

Fortunately, in my Successful Investing advisory service, we have exposure to an exchange-traded fund (ETF) designed to go higher along with bond yields. We currently have very solid unrealized gains in this position, as we have been way out in front of the rising-rates equation. If you’d like to know more about this service, just click here.