LONDON, March 20 (Reuters) - U.S. bonds fell on Wednesday as investors took profit on a recent rally before the outcome of the Federal Reserve meeting but concerns over Cyprus's ability to avoid default should limit selling.
Cyprus came closer to default after its parliament rejected an unprecedented levy on bank deposits which was a pre-condition for them receiving a bailout.
U.S. Treasuries rose in the previous session, with analysts saying markets had already been pricing in that the controversial legislation would not be passed.
Ten-year U.S. Treasury yields rose 3 basis points to 1.93 percent, and analysts expected them to remain below 2 percent as long as Cyprus's future remains in doubt.
"As long as we have this situation in Cyprus, I think we are going to be where we are at the moment," Philip Marey, strategist at Rabobank said.
"A major move upwards, I don't see it happening unless we get some surprise out of the (Federal Reserve) today."
The U.S. central bank looks set to keep buying $85 billion a month in mortgage and Treasury bonds in an effort to encourage investment and bolster a weak economic recovery.
Officials are expected to have spent much of a meeting this week debating the potential risks from the central bank's stimulus plan, but Chairman Ben Bernanke has already signaled he believes the costs of inaction are even greater.
Marey said 10-year yields would rise above 2 percent again if the Fed surprised markets with a statement which they interpreted as indicating quantitative easing could be unwound earlier than expected.
Five-year U.S. yields rose 1.3 bps to 0.79 percent and thirty-year borrowing costs crept 2.3 bps higher to 3.15 percent.
"The vote was already known yesterday so the reaction was ahead of the vote, it was widely expected that there could be a no vote," Piet Lammens, strategist at KBC said, explaining the fall in Treasury prices this session.