Short-term yields tumble on Fed; 10-year yield pares gains


Treasury yields turned lower on Wednesday after the Federal Reserve indicated it sees the economy as strong enough to handle a rate rise by the end of the year.

The Fed left interest rates unchanged and provided only faint clues about when the first hike in nine years might occur.

Read MoreFed leaves interest rates unchanged

The yield on the benchmark 10-year Treasury hovered around 2.31 percent, down from a session peak of 2.39 percent before the decision.

Short-term yields tumbled on the decision, with the yield curve between the and 30-year bond steepening to 144 basis points.

The two-year note yield after the Fed announcement

The yield fell to a session low of 0.64 percent, after trading as high as 0.75 percent ahead of the meeting. The yield on the five-year note declined to 1.61 percent, compared with 1.72 percent before the statement.

U.S. short-term interest rate futures contracts dropped, then rose, as traders tried to assess the likely timing of a first rate hike after the announcement.

FOMC members deemed economic activity "expanding moderately" with various sectors seeing some activity.

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The language, though, was tempered and the various indicators the Fed uses to tip its hand on policy showed little movement. Economic estimates from central bank officials showed a considerably lower expectation for growth this year.

The 10-year yield remains below eight-month highs of 2.50 percent hit last week, with safe-haven bonds underpinned by nagging concerns about the future of cash-strapped Greece.

That country is set to default on a 1.6 billion euro ($1.8 billion) debt repayment to the International Monetary Fund on June 30 unless it receives fresh funds before then from its creditors, who insist Athens needs to make further reforms if it wants to unlock aid.

Read More El-Erian: Major chance of a Greek 'accident' happening

Ahead of the Fed statement, the total mortgage application volume fell 5.5 percent week over week, the Mortgage Bankers Association (MBA) said.

"Rising rates continue to create volatility in weekly mortgage applications activity," noted Michael Fratantoni, the MBA's chief economist.

—CNBC's Jeff Cox and Reuters contributed to this report.