Bond rally cools after Beige Book, weak auction

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U.S. Treasury prices pared some gains on Wednesday after the government's auction of 30-year bonds and the release of the Fed's monthly Beige Book report on business activity.

Yields on the U.S. 30-year Treasury bond had tumbled to a record low earlier after a surprise drop in a measure of retail sales in December sparked fresh bets the Federal Reserve might not raise interest rates in 2015.

The Commerce Department said retail sales fell 0.9 percent, the biggest decline since last January, after increasing 0.4 percent in November. Economists had expected only a 0.1 percent drop. Retail sales excluding automobiles, gasoline, building materials and food services fell 0.4 percent last month after a 0.6 percent rise in November. Economists had expected core retail sales to rise 0.4 percent.

The U.S. central bank expressed concern over the impact of lower oil prices on the economy's health as some districts reported slowing growth thanks to energy-related woes, according to the latest Beige Book report.

In afternoon trading, the yield on the 10-year note was at 1.85 percent, up from 1.814 percent before the Beige Book report. Earlier, it touched 1.784 percent—its lowest level since May 2013.

The yield on the government's 30-year bond last traded at 2.46 percent, compared with 2.423 percent before the Fed's release.

Read MoreU.S. retail sales weak, cast a cloud on consumer spending

It fell to a record low of 2.395 percent, surpassing the previous record low of 2.443 percent set in July 2012, according to Tradeweb data.

Gus Faucher, senior economist at PNC, said he thinks the bond market overreacted to the retail data, adding that the fundamentals for consumer spending still look strong.

"I think think today was a blip," Faucher said. "The markets are on edge over worries about the global economy. There are concerns that the weakness could potentially be a drag on U.S. growth. "

He said the direction of the U.S. economy looks solid. PNC's current outlook calls for the 10-year note and 30-year bond yields to end the year at 2.70 percent and 3.20 percent, respectively.

The Treasury Department auctioned $13 billion in 30-year bonds at a high yield of 2.430 percent—the lowest on record. The bid-to-cover ratio, an indicator of demand, was 2.32, versus the recent average of 2.49. The figure was well below December's 23-month high of 2.76.

Indirect bidders, which include major central banks, were awarded 48.9 percent, above the 47 percent recent average.

Direct bidders, which includes domestic money managers, brought 13.7 percent of the offering, versus an average of 18 percent.

In the "when-issued" market, traders expected the second reopening of the 30-year bond to sell at a yield of 2.441 percent, down some 40 basis points from the yield at the December auction.

Read MoreChicago trader: Profit from lower bond yields

Yields on other Treasury maturities were down 7 to 10 basis points from late on Tuesday.

"People had thought lower oil prices would help consumer spending. People are very confused so they run into safety assets," said Stanley Sun, interest rate strategist at Nomura Securities International in New York.

The U.S. five-year Treasury yield fell to its lowest in nearly three months. The U.S. two-year Treasury yield fell to its lowest in more than six weeks to near 0.48 percent.

—Reuters contributed to this report.