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Treasury bonds extended gains on Thursday, pushing yields to session lows, after the Federal Reserve concluded its two-day policy meeting and decided to keep benchmark interest rates unchanged.
The yield on the benchmark 10-year Treasury note was at 2.217 percent, near a session low, after closing at 2.303 percent on Wednesday. The yield on the 30-year Treasury bond fell to 3.036 percent, after closing at 3.09 percent. The yield on a bond falls when its price rises.
Short-dated yields, which are highly sensitive to the Fed's monetary policy forecasts, also sat near session lows, with the yield giving up the week's gains. Two-year note yields tumbled 12 basis points, losing about 15 percent of their value, to 0.70 percent, after rising to a four-year high of 0.811 percent on Wednesday.
Equity investors piled into the iShares 20+ Year Treasury Bond ETF , which tracks the prices of government bonds with longer maturities, in a bet that rates will stay lower for longer. The ETF rose by more than 1 percent Thursday, paring its losses for the year to under 5 percent.
An argument can be made for an interest rate rise at this time, but "in light of the heightened uncertainties abroad and a slightly softer expected path for inflation," the committee wanted to wait for further improvement in the labor market, among other developments, to bolster its confidence that inflation would meet its targets, Fed chair Janet Yellen said in a news conference on Thursday.
Fed policymakers slightly lowered their projections for growth and inflation in the next two years, an outlook that likely factored into their decision to hold off on raising interest rates.
The "Fed is even more dovish this time because they don't see core inflation moving back to two percent until 2018," said Joseph Lavorgna, chief U.S. economist for Deutsche Bank.
The central banks also reduced its estimate for long-run unemployment to 4.9 percent from 5 percent. This suggests that it is willing to wait for unemployment to fall further before cutting rates. Unemployment stands at 5.1 percent.
"The Fed follows the bond market. The bond market loudly advised against a hike and the Fed, true to form, listened," Jeffrey Gundlach, founder of Doubleline Capital, told CNBC after the decision.
And Fed policymakers now see just one rate hike likely to take place this year, down from two in their previous forecast, issued in June.
The Fed now expects that its preferred measure of inflation will rise only 0.4 percent this year, down from 0.7 percent in June. Both are far from the Fed's target of 2 percent.
Even in the final hours leading up to the announcement, Wall Street remained sharply divided over whether the central bank would raise the target rate for the first time in nine years or push it off to a later meeting.
The Fed's statement has increased market uncertainty on how it will proceed since external international developments appear to have a lot of influence, Jeff Rosenberg, chief investment strategist for fixed income at BlackRock, said.
"[T]he Fed doesn't have a lot of influence over those so it adds to a lot of uncertainty," Rosenberg said. "So this is not only a pause in terms of not tightening, but a very dovish pause, and I think that's a bit of a surprise here to the market at least in the bond market—why you're seeing such a pretty aggressive move here in shorter interest rates."
The market is now fully pricing the first rate hike for March 2016, according to RBS' interpretation of market data.
Earlier, U.S. weekly jobless claims came in at 264,000, better than the expected 275,000, while housing starts fell more than expected in August. The Philly Fed index for September came in at -6, below the consensus estimate of 6 and well below the 8.3 from August.
The Fed's Federal Open Market Committee (FOMC) decision is expected to be announced at 2 p.m. ET, with a press conference from Yellen set to follow at 2:30 p.m.
—CNBC's John Melloy and The AP contributed to this report.