* In S&P 500, over 450 stocks end the year higher
* Equities expected to keep rallying in 2014
* Rise in bond yields to be tempered by deflation fears
* Euro near 2-year high vs dollar, may weaken in 2014
By David Gaffen
NEW YORK, Dec 31 U.S. stocks closed 2013 by setting record highs and world equity markets ended at six-year peaks on Tuesday, while benchmark bond yields posted their first annual rise since 2009.
Ultra-easy monetary policies and an improving economic outlook worldwide led to a stellar year for stocks. Equity strategists see the gains continuing into 2014 as economic growth improves even as the Federal Reserve steadily trims its bond-buying stimulus.
"This has been a terrific year, with all the concerns we had in January proving unfounded, and with current economic growth giving us a strong outlook for 2013," said John Carey, portfolio manager at Pioneer Investment Management in Boston.
The S&P 500 benchmark ended its best year since 1997 with a 29 percent gain. More than 450 of the stocks in the index ended the year higher, the most since S&P started collecting that data in 1980. Japan's Nikkei ended the year up 56.7 percent and European shares gained 16 percent.
MSCI's all-country world equity index was up 0.22 percent at 408.33, its highest level since late 2007. It has gained 20 percent this year.
The Barclays U.S. Aggregate Index of investment-grade bonds ended with its worst year since 1994, as interest rates rose in anticipation of reduced Fed stimulus and higher-yielding stocks attracted more investment flows.
Assets favored by investors in economic downturns took a beating in 2013, with falling prices driving top-rated U.S. and German bond yields to near their highest levels in around two years and gold limping toward its worst annual performance in three decades, losing more than 27 percent.
The yield on the U.S. 10-year Treasury note, which sets the standard for global borrowing costs, has risen to 3 percent from 1.75 percent at the start of the year, but is seen rising to only 3.35 percent in 2014. The 10-year note was yielding 3.02 percent on Tuesday.
The Dow Jones industrial average rose 72.37 points, or 0.44 percent, at 16,576.66. The Standard & Poor's 500 Index was up 7.29 points, or 0.40 percent, at 1,848.36. The Nasdaq Composite Index was up 22.39 points, or 0.54 percent, at 4,176.59.
Reuters polls show European stocks are expected to hit new highs in 2014, while Chinese, U.S. and other major stock markets are also seen posting solid gains.
Emerging markets have been a noted exception to the rally in equities. MSCI's EM Index fell 5 percent in 2013 on worries that cuts in global monetary stimulus could expose economic imbalances and as funds return to the rich world.
Russian stocks hit eight-day lows after two deadly attacks in less than 24 hours that raised security fears ahead of the Winter Olympics.
EURO NEAR TWO-YEAR HIGH
The euro ended 2013 close to its highest level in two years against the dollar. But a Reuters poll shows it is expected to reverse its upward trend next year as the continued soft stance of the European Central Bank contrasts with the Fed's.
On Tuesday, the single currency inched down to $1.3756 , still up more than 4 percent for the year. The dollar was slightly higher against the yen at 105.32, posting its biggest annual gain against the yen in 34 years, with the Japanese currency hit by the Bank of Japan's money-printing.
The easing of the euro zone crisis and signs of a pick-up in economic activity even in the bloc's weakest states have offered strong support to the euro and brought Italian and Spanish debt yields down to just over half their crisis peaks.
In the oil market, U.S. oil futures ended down 87 cents to $98.42.