Treasurys under pressure

NEW YORK (CNNMoney.com) -- Bond prices fell late Monday, as investors shifted their attention to higher-yielding assets like equities amid optimism about the economy.

Stocks surged, with the Dow closing up more than 85 points, in a holiday-shortened week.

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Click the chart to view other bond prices and yields.

"People are positioning ahead of next year, trying to focus on 2010," said Bill Larkin, analyst at Cabot Money Management. "They're hoping for a brighter new year."

Investors typically buy Treasurys as a so-called safe play because they are backed by the government with a guaranteed yield, although those yields are generally lower than stock returns.

Treasury prices fell Monday, with the 10-year note yield rising to 3.68% from 3.50% late Friday. Prices and yields move in opposite directions.

As the year winds down, bonds and stocks have been trading choppily amid thin volume as many market participants close their books for the holiday season.

Short-term bond prices have largely been trending lower in recent months, leading many investors to keep a close eye on the benchmark yield curve -- often considered a gauge of economic health.

The curve, which measures the difference between the yields of the 2-year and 10-year bonds, has been steepening. On Monday the curve hit 2.78%, or 278 basis points. Compare that with a year ago, when it was 2.16%.

When the spread between the two yields widens, it's considered a sign of recovery because it's seen as the market rewarding investors for socking their cash away for an extended period.

But when the spread narrows or turns negative, it indicates investors are nervous, and that they're looking for safe havens like Treasurys to guard their cash.

For example, in 2007, the curve started to flatten -- a harbinger of impending recession. The yield on the 2-year note skyrocketed to near 5%, coming nearly on par with the 10-year note.

Fed moves. Government action has played a role in the curve's steepening. The yield curve's short end, the 2-year note yield, is the most sensitive to changes in monetary policy.

For the past year, the Federal Reserve has kept its key interest rate at a target range of between 0% and 0.25% in an effort to ease the credit crunch and spark lending.

"All that the Fed can control is the short end of the curve, and I think they should be moving it up at this point," Larkin said.

But the central bank has tended to "tighten policy for too long," as hiking rates is a delicate issue, Larkin said.

"You can't wait too long to shift those gears, but if you raise rates too early you have to cut them again," Larkin said. "It's a tricky thing, so [the Fed is] going to wait to hike rates until it's so obvious there's a recovery."

As a result, the 2-year yield will likely stay in current range. On the other end, rates for the 10-year are low and have room to move higher above 4%, pushing the spread even higher, Larkin said.

Bond prices. The 10-year note's price fell 1-4/32 to 97-15/32.

The 30-year long bond fell 1-21/32 to 96-30/32 and its yield was 4.56%. The 2-year bond fell 5/32 to 99-24/32 in price and yielded 0.86%.