TREASURIES-Yields drop as Fed maintains purchases, surprises investors
* Yields drop as Fed maintains $85 billion purchases a month
* Fed surprises investors that had positioned for tapering
* Ten-year note yields fall to 2.76 percent
NEW YORK, Sept 18 (Reuters) - U.S. Treasuries yields fell on Wednesday after the Federal Reserve said it would maintain its bond purchases at $85 billion a month, surprising investors who had expected it would reduce the size of its purchase program. Citing strains in the economy from tight fiscal policy and higher mortgage rates, the Fed decided against the tapering of asset purchases that investors had all but priced into stock and bond markets. 1/8ID: nL2N0HE1S6 3/8 The statement caused a dramatic turnaround in Treasuries prices, which had weakened heading into the announcement. "Obviously this was very surprising. There is no question that we were being set up for Fed tapering," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York. Benchmark 10-year notes were last up 27/32 in price to yield 2.75 percent, down from 2.86 percent before the statement. Five-year notes gained 20/32 in price to yield 1.48 percent, down from 1.63 percent before the statement. Thirty-year bonds rose 23/32 in price to yield 3.79 percent, down from 3.84 percent before the statement.