North American stocks closed higher Tuesday, with U.S. shares making their biggest gains this year.

In Toronto, the S&P/TSX composite index was up 109.68 points, or 0.88 per cent, at 12,537.69. The Canadian dollar gained 0.35 of a cent to 101.09 cents US.

U.S. stocks rallied from the opening bell Tuesday after the government said February retail sales gains were the strongest since September. Bank stocks turbocharged the rally. JPMorgan Chase gave the rally extra juice by announcing it would raise its stock dividend.

The Dow Jones industrial average closed up 217.97 points, or 1.7 per cent, at 13,177.68. That's the highest close since the last day of 2007. The Nasdaq composite index finished up 56.22, or 1.9 per cent, at 3039.88, for its first close above 3,000 since December 2000.

Advancing stocks outnumbered decliners by about 5-to-1 on the New York Stock Exchange. Volume was about average at 4 billion shares.

The rally gained strength in the afternoon when the Federal Reserve said it saw signs of an improving economy and expected the unemployment rate to keep falling. The Fed also said strains in the global financial markets have eased.

Then JPMorgan Chase, the country's largest bank by assets, announced that it plans to buy back as much as $15 billion of its stock and raise its quarterly dividend to 30 cents per share from 25 cents a share.

"That's what really made the day," said Jeffrey Kleintop, chief market strategist a LPL Financial.

Fed moves up release of bank stress test results

The announcement came just before the Fed made a surprise announcement of the results of its annual stress test for banks. JPMorgan Chase and 14 other financial institutions passed. Four, including Citigroup, failed.

The Fed had planned to release the results on Thursday afternoon. But it moved up the announcement after JPMorgan declared its dividend increase. The bank said it had the Fed's blessing to raise the dividend.

JPMorgan Chase stock gained seven per cent, and other banks followed. Citigroup and Goldman Sachs gained six per cent. Banks were easily the best-performing stocks in the market, gaining almost four per cent as a group.

Their shares rose during the session, and before the release of the test results, on speculation that having passed the stress tests, they too would hike their dividends.

Citigroup stock was down four per cent in after-hours trading following the Fed stress test announcement.

Jack Ablin, chief investment officer at Harris Private Bank, said the key difference between the Nasdaq then and now is that the technology companies that dominate the index only promised profits 12 years ago.

Today those profits are real, and massive. The Nasdaq's largest companies are Apple, Microsoft and Google.

"The Nasdaq hasn't done much of anything for 12 years, but it's had a huge rally in earnings," Ablin said.

U.S. bond prices fall

Traders dumped U.S. Treasury debt Tuesday after the strong retail sales data and the Federal Reserve policy announcement dampened hopes that the Fed will buy more bonds to stimulate the economy.   

The yield on the 10-year Treasury note leaped above its highest closing level in more than four months after the Fed said short-term inflation is likely and the labour market recovery has strengthened.   

The yield on the 10-year Treasury note rose to 2.11 per cent as of 3 p.m. from 2.03 per cent late Monday.

Its price fell 72 cents for every $100 invested.   

An auction of $21 billion in 10-year notes drew strong interest and high bids, a sign that overall demand remains strong for the ultra-safe investments.

The notes were priced to yield 2.08 per cent, lower than the market yield at the time. That means bids came in higher than market prices, a sign of good demand.   

The yield on the 10-year note rose all morning before the auction took place.

Traders dumped Treasurys after the government said that retail sales rose 1.1 per cent in February, the biggest gain since September. The strengthening labour market helped Americans buy more autos, clothes and appliances.   

Positive economic news generally reduces demand for low-risk Treasurys.

Traders would rather put their money in investments such as stocks, which can deliver bigger profits when the economy is strong. 

As demand for a Treasury falls, its yield rises. In effect, traders are demanding a slightly less-tiny return in exchange for holding a security with limited potential profits.