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Bonds wobbly after sharp selloff; Fed awaited

U.S. bond prices wavered between negative and positive territory on Wednesday after a sharp selloff in the previous session, with caution expected to take hold as the U.S. Federal Reserve's begins a two-day meeting.

Yields on interest-rate sensitive two-year Treasurys rose about 8 basis points on Tuesday to its highest level in four and a half years as bond market investors braced for the possibility of the first rise in U.S. interest rates in almost a decade.

"The market is pricing in a 30 percent chance of a hike this week and if the Fed goes, then the market has to re-price," Barnaby Martin, MD, European Credit Strategy at Bank of America Merrill Lynch Global Research, told CNBC's "Squawk Box Europe" on Wednesday.

"We believe the front end is vulnerable under pretty much all scenarios—whether the Fed goes and says it's patient or whether its goes and suggests there's more," he said.

Read MoreCould the market have rallied itself into a rate hike?

Two-year note yields were flat at 0.81 percent, off of Tuesday's high of 0.815 percent.

Benchmark 10-year note yields were little changed at 2.28 percent, after hitting a one-and-a-half month high of about 2.29 percent set on Tuesday. Thirty-year bonds were also flat at 3.07 percent. When a bond yield falls, its price rises.

Symbol
Yield
 
Change
%Change
US 3-MO
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US 1-YR
---
US 2-YR
---
US 5-YR
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US 10-YR
---
US 30-YR
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The Fed concludes its two-day meeting on Thursday. Economists are split on what the Fed will do and are not pricing in a hike for September, with about 28 percent odds factored into fed funds futures.

On the data front, U.S. consumer price index for August came in down 0.1 percent.

Analysts at Daiwa Capital Markets said they expected the headline consumer price index (CPI) to have remained unchanged at a 0.2 percent rise year-on-year. They forecast the core CPI rate, which excludes food energy prices, to rise 1.9 percent from a year earlier.