Treasurys extend rally after Fed decision

NEW YORK (CNNMoney.com) -- Treasurys rallied Wednesday, sending the yield on the benchmark note to its lowest level in a year, as investors reacted to a record drop in new home sales and a big auction of U.S. debt, while taking an unsurprising statement from the Federal Reserve in stride.

What prices are doing: At 2:25 ET, about 10 minutes after the Fed's announcement, the benchmark 10-year note was up 17/32 to 103-11/32. Its yield fell to 3.11%, down from 3.16% late Tuesday, hitting a 52-week low. Bond prices and yields move in opposite directions.

The 30-year bond rose 29/32 to 105-17/32 and yielded 4.06%

The 2-year note gained 7/32 to 99-30/32. Its yield rose to 0.67% from a median yield of 0.72% at Tuesday's auction.

What's moving the market: Treasury investors were awaiting the latest decision from the Fed, which said Wednesday it will continue to hold rates steady near historic lows. The central bank said it sees the "economic recovery is proceeding and that the labor market is improving gradually."

The announcement wasn't much of a surprise to Treasury analysts, who were expecting the Fed to maintain its status quo language in referencing the economic recovery.

Earlier in the day, Treasurys gained as investors reacted to a report that showed new home sales declined 32.7% to a seasonally adjusted rate of 300,000 last month, down from 446,000 in April. Sales year-over-year were down 18.3%.

Economists surveyed by Briefing.com had expected May sales to slide to an annual rate of 430,000.

May sales were the lowest since the government began tracking the data in 1963. This was the first new home sales report after the homebuyer tax credit expired.

The report raised worries about the economic recovery in the United States and added to ongoing concerns about the fiscal problems in Europe. Those fears drove investors to the safe-haven appeal of U.S. debt, which is considered a low-risk investment in times of economic instability.

Meanwhile, a government auction of $38 billion in 5-year notes received weak demand. It was the second of three major auctions this week.

What analysts are saying: "We had a small bid earlier on renewed concerns about European credit issues," said Kim Rupert, a fixed-income analyst at Action Economics. "After the new home sales came out we extended gains substantially."

She said that investors are also nervous that steps policymakers have taken in Europe to cut in deficits will slow economic growth and hinder the global recovery.

Rupert called the Fed's announcement a bit "dovish" seen as a month earlier, policy makers said the economic recovery was continuing to "strengthen." This month's language seems a bit weaker because it characterizes the recovery as "proceeding" not "strengthening" she said, which adds further support to Treasurys' rally.