Treasury prices pared gains after the government's auction of $42B in 5yr notes garnered weak demand. Bonds had been higher before the auction, with investors relieved after Fed Chairman Bernanke said that interest rates are likely to remain low "for an extended period." Yields on 10yr notes had touched their lowest level in more than a week. Yields on 2yr notes declined 2bps to 0.86%.  Yields on 10yr notes were little changed at 3.69%, after having touched 3.65% earlier.

The 10 yr yield had dropped the most in more than 2 months on Tuesday, after a surprisingly weak report on U.S. consumer confidence.

The Treasury Department sold $42B in 5yr notes at a yield of 2.395%, a little higher than traders expected. Bidders offered to buy 2.75 times the amount of debt sold, compared to an average of 2.71 times at the last four sales of the securities. Indirect bidders, a class that include foreign central banks, bought 40.3%, compared to an average of 49.8% of recent sales. Direct bidders, which include domestic money managers and are often added to indirect bids to gauge investor demand, purchased another 12.8%, higher than the 6.6% seen recently.

More of the auction going to direct or indirect bidders, as opposed to primary dealers, is deemed good for the government and the market. Primary dealers tend to turn around and sell much of the new purchases, weighing on prices. The auction follows Tuesday's successful sale of $44B in 2yr notes. On Thursday, the Treasury will finish off the week's auctions by selling $32B in 7yr notes. All the note-auction amounts match the previous month's sizes. 

In the first of two days of testimony scheduled for Capitol Hill, Bernanke's comments to lawmakers supported expectations that the Fed will hold off on any major policy tightening until at least this summer. Analysts seemed comfortable that the top U.S. central banker's outlook for weak economic growth would keep a lid on inflation. 

Also arguing for a sluggish recovery and supporting bonds, a government report showed new-home sales unexpectedly dropped 11% in January, the lowest rate on record.

Traders also noted earlier that Federal Reserve Bank of St. Louis President James Bullard said late Tuesday that interest rates could be kept on hold through this year if the economy performs as expected.

The Fed's promise in recent official statements to keep benchmark rates low for an "extended period" could mean about six months, he said, according to a DJ Newswires report.