LONDON: US Treasuries slipped in Europe on Wednesday as forecast-beating corporate earnings boosted equities and cooled demand for low-risk debt but falls were limited before the Federal Reserve's policy decision later in the day.
Benchmark T-note yields edged higher but were expected to hold around 2 percent with investors anticipating the Fed will restate its pledge that interest rates will stay near zero until at least 2014 given mixed economic data.
The Fed, which concludes its two-day meeting later on Wednesday, was not expected to opt for a third round of quantitative easing via bond purchases to stimulate the economy.
"The risk you have is potentially some of the Fed governors are going to change their view on when they are going to hike rates. That may be a definite outlier for the market," a trader said.
Ten-year T-note yields stood at 1.98 percent, compared to 1.97 percent in late US trade while the 30-year T-bond last yielded 3.14 percent, up from 3.12 percent.
The flight to quality which has kept benchmark 10-year yields below 2 percent paused as euro zone debt markets stabilised after successful Dutch, Spanish and Italian debt sales on Tuesday calmed fears about a further blow-out in the debt crisis following the collapse of the Dutch government.
European shares were last up 0.7 percent, extending Wednesday's bounce from three-month lows, while US stock index futures pointed to a stronger start on Wall Street after Apple Inc's quarterly profit almost doubled, beating Wall Street's estimates.
Tomoaki Shisido, a fixed income analyst at Nomura Securities in Tokyo, said lingering expectations of more stimulus from the Fed were also propping up equities.
"The bond market has already priced in to some extent that there might not be QE3, but the equities market is still hoping for it," he said.
"While the outcome of the Fed meeting will probably be neutral for bonds, bonds could benefit from anything that disappoints the equities market."
On the supply side, investors will be watching the outcome of the Treasury's sale of $35 billion of new five-year notes later on Wednesday, as well as $29 billion of new seven-year debt on Thursday.
Tuesday's $35 billion two-year Treasury auction cleared at a yield of 0.27 percent, while the share of the notes bought by direct bidders, including some Wall Street firms and large fund managers, was 7.8 percent, the smallest since Feb. 2011.
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