Bonds turn lower after Fed

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NEW YORK (CNNMoney.com) -- Treasurys mostly fell Wednesday after a successful auction and a Federal Reserve policy statement that said the economy will continue to be weak for months to come.

At the conclusion of its two-day meeting, the Federal Open Markets Committee said the economic decline is slowing, though it will continue to contract for a while. Though the committee left key rates steady, bond investors were keen to hear if the body sees the economy in recovery or not.

The statement matched recent Fed announcements, saying inflation is not a near-term concern, even though commodity prices continue to rise.

But many investors were looking for the Fed to up its effort to buy long-term Treasurys. The $300 billion program, which began in March, was aimed at lowering 10-year bond yields and interest rates tied to those yields.

Though initially successful, 10-year yields have rocketed back up, and many have called on the Fed to buy more bonds or extend the program beyond the autumn. The Fed said it had no plans to increase the amount or extend the purchasing period, but it will continue to reevaluate the program.

"Many were hoping it would extend its purchases beyond autumn," said Kim Rupert, fixed income analyst at Action Economics. "This was not a very fulfilling statement, and bonds will trade back and forth for a while while we make sense of what the Fed didn't say."

Bonds had been mostly selling off prior to a 1 p.m. ET announcement that there was plenty of open interest in Wednesday's auction of 5-year notes. The bid-to-cover ratio for the $37 billion in debt was more than 2.5, which is stronger than the past few 5-year auctions.

Treasurys mainly turned positive on the auction news, though longer-term bonds struggled to get out of the red.

Stock impact: Pressuring bonds throughout most of the day was a rising stock market, though a triple-digit rally in the Dow Jones industrial average turned into a loss after the Fed announcement.

Though stocks have mostly fallen in recent days, they have been on a tear in the past three months as economic indicators point to a recovery or at least a looming bounce back.

Bonds have tumbled since the stock market rally began in March, as investors opted for higher-reward stocks rather than bonds. Furthermore, escalating U.S. debt levels got potential Treasury buyers worried that inflation would start to rise and a mass bond exit was in the future.

"Some investors are selling off because Fed didn't hint at an exit strategy from its recovery programs," said Rupert. "The bond vigilantes are having their way."

Prices: The benchmark 10-year note fell 11/32 to 95-13/32, and its yield rose to 3.68%. Bond prices and yields move in opposite directions.

The 30-year bond fell 1-9/32 to 96-30/32, as its yield rose to 4.44%. The long bond briefly entered positive territory in the afternoon before falling minutes later.

The 2-year note was up 8/32 to 99-26/32, and its yield edged down to 1.22%.

The yield on the 3-month bill was 0.19%.

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