"With the Fed statement not sounding as hawkish as originally feared, the [Treasury] market rallied sharply after the FOMC announcement," said UBS fixed income strategist Benjamin Cheng.

Markets were priced in for a scenario in which the Fed holds throughout the summer and hikes rates late in the year. Ian Shepherdson, chief U.S. economist from HFE, said Fed rate policy will now depend on the economy: "What happens next depends on the data, not the Fed's intentions. If the data deteriorate further, as we expect, the Fed will ease again. They are slaves to the numbers."

The FOMC now won't meet until June 25. Fed fund futures are pricing in a 20.6% chance they will cut by a quarter-point at that meeting, with the remainder priced for a hold.

U.S. two-year yields are down 7.2 bps to 2.28%, five-year yields down 8.5 bps to 3.03%, 10-year yields down 8.4 bps to 3.74% and 30-year yields down 7.3 bps to 4.48%. The Eurodollar September 08 contract is up 11.5 ticks to 97.31. The 10/2 year spread flattened 0.69 bps to 146.12. The yield curve is flatter with the difference in yield between the U.S. two-year and 10-year notes down 0.7 bps to 146.12 bps.

Eric Lascelles, chief market strategist at TD Securities, said he believes the Fed did a good job of signalling a pause and some of the Treasury rally could be a result of traders coming in from the sidelines after the FOMC. "It might not even be a reflection of the Fed, a lot of people take off risk ahead of a decision and now they might be coming back in," he said.

The FOMC was only one among many economic data points in the U.S. Earlier, April's ADP employment change showed a 10,000 gain, up on expectations for a 60,000 drop. First-quarter GDP was also higher than expectations calling for a 0.5% incline, increasing instead by 0.6%. The Chicago purchasing managers' index for April, despite remaining within contractionary levels, was also above expectations. It came in at a reading of 48.3, up slightly from a prior reading of 48.2 and the 47.5 expected.

The earlier data spurred some optimism in the markets and major stock indexes were up about 1% ahead of the Fed. The Dow Jones industrial average closed down 11.81 points to 12820.13, the S&P 500 down 5.35 points to 1385.59 and the Nasdaq down 13.30 points to 2412.80.

Canadian market watchers had plenty to trade on independent of the U.S. Statistics Canada reported that gross domestic product contracted by 0.2% in February, tugged downward mainly by sluggishness in manufacturing and wholesale trade.

Later, Bank of Canada governor Mark Carney appeared before Parliament and reiterated that "further monetary policy stimulus will likely be needed," a phrase that has signalled future rate cuts.

Canadian stocks and CGB's outperformed their U.S. counterparts. Toronto's S&P/TSX composite index closed up 109.94 points to 13935.54. Yields on two-year Canadian government bonds are down 11.1 bps to 2.75%, five-year yields down 12.0 bps to 3.06%, 10-year yields down 10.6 bps to 3.59% and 30-year yields down 7.7 bps to 4.09%. The Canadian 10-year note is yielding 14.57 bps less than the U.S. 10-year note.

In Germany, returns on two-year German bonds are down 0.5 bps to 3.76%, five-year yields up 0.6 bps to 3.88%, 10-year yields down 1.5 bps to 4.12% and 30-year yields down 4.0 bps to 4.62%.

Yields on UK two-year bonds are down 3.4 bps to 4.42%, five-year yields down 4.1 bps to 4.37%, 10-year yields down 1.4 bps to 4.67% and 30-year yields down 1.2 bps to 4.50%.

The U.S. dollar softened to session lows against the euro after the Fed rate cut, while the Canadian dollar made a push toward parity.

"Markets thought the Fed was done, but with the door still open a crack, odds of a cut by late summer have crept up," said Jamie Coleman, senior forex analyst at Thompson.

The euro is up 0.0052 to 1.5625 against the USD, down 0.0011 to 1.5745 against the Canadian dollar and higher by 0.43 to 162.40 against the yen.

Against the U.S. dollar, the Canadian dollar is up 0.0048 to 0.9923 and the Australian dollar is higher by 0.0096 to 0.9435.

The U.S. dollar is down 0.05 to 103.97 against the yen and the pound is up 0.0192 to 1.9889 USD.

The Canadian dollar is up 0.47 to 103.17 against the yen and lower by 0.0095 to 2.0043 against the pound sterling.

The U.S. Dollar Index was down 0.2870 to 72.6080.

Crude oil prices initially dropped rapidly with the release of U.S. inventories. Crude oil stockpiles increased by 3848k barrels in the week ending April 25, according to the data released by the Department of Energy. The Bloomberg consensus estimate of analysts was for a 950k increase in supply.

WTI crude oil is down $0.74 to $114.89 while the front month gold contract at the Chicago Board of Trade is up $2.00 to $879.00.

The week barely slows on Thursday with U.S. inflation data in the form of monthly PCE figures and the ISM manufacturing survey.

All data taken at 4:24 p.m. EDT.

By Adam Button, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Cristina Markham, This email address is being protected from spam bots, you need Javascript enabled to view it