Treasury debt prices pared losses after the Federal Reserve cut its economic growth forecasts and said it expects much weaker 2008 growth than in 2007.
The Fed said the weaker economic growth was due to housing, the global credit crunch, and soaring energy costs.
The benchmark 10-year Treasury note was trading 6/32 lower in price for a yield of 3.80 percent from 3.78 percent late Tuesday, while the 2-year Treasury note was trading 2/32 lower in price for a yield of 2.35 percent from 2.31 percent.
Treasurys slipped earlier as profit-taking on the previous day's gains made early weakness -- driven by a rise in German business sentiment -- more pronounced before the release of minutes from the Federal Reserve's most recent monetary policy meeting.
Treasurys opened lower after an unexpected gain in German business sentiment, which suggested growth in Europe's largest economy might ease only slightly after a strong first quarter, pushed euro zone debt and rate futures lower overnight.
At 12:30 p.m. June Bund futures were 67 ticks lower at 112.91.
Similarly, benchmark 10-year Treasury notes fell 10/32 in price while their yields, which move inversely to price, rose to 3.83 percent from 3.79 percent Tuesday.
Two-year notes fell 4/32 in price, their yields rising to 2.38 percent from 2.33 percent Tuesday.
"There's some expectation that the Fed minutes might put more of an emphasis on inflation," said Thomas Higgins, chief economist at Payden & Rygel Investment Management.
But Higgins noted that Fed Vice Chairman Donald Kohn said Tuesdaythat interest rates seem to be at a level that will allow inflation to moderate over the medium term.
"The Fed seems to think that higher commodity prices won't cause inflation in the broader economy because of growing slack in product and labor markets," Higgins said.
The Fed has cut benchmark rates by 3.25 percentage points, to 2 percent, since September to bolster a weakening economy.
It has also injected hundreds of billions of dollars of liquidity into financial markets to ease credit strains.
Analysts said profit-taking and consolidation in well-worn ranges also drove trade that lacked clear signals.
"Bonds have been fairly rangebound recently with buyers stepping in above 3.90 percent on the 10-year yield and sellers coming in when the yield goes below 3.80 percent," said Bill Bellamy, director of fixed-income at Thompson, Siegel & Walmsley in Richmond, Va.
"We've clearly sold off meaningfully since the end of April," Payden & Rygel's Higgins said. "With the Fed likely on hold, we'll probably be rangebound for a while. On better-than-expected economic news, we'll test the high end (on yields) and on worse-than-expected economic news we'll test the low end."
Signs of easier credit market conditions also sapped the safety bid for U.S. Treasurys, analysts noted.
The spread on interest rate swaps narrowed in early trade as one-month London interbank offered rates, or Libor, continued to drift lower. Three-month Libor was fixed at 2.63813 pct, its lowest in nearly nine weeks.
"The flight-to quality trade seems to be going the way of the Model T," said Chris Rupkey, vice president and chief financial economist at Bank of Tokyo/Mitsubishi UFJ.
Analysts said bond investors would pay some attention to minutes from the April 30 meeting of the Federal Open Market Committee, when the Fed cut benchmark short-term rates by a quarter percentage pointand left the market with the impression that the reduction might be the last of this easing cycle.
Financial markets are also watching oil prices. High prices can be negative for Treasurys if seen merely as an inflationary influence. But they can also be positive for Treasurys if viewed as a restraint on economic growth.
U.S. crude futures rose to a record high above $132 a barrelon Wednesday.