U.S. government-bond yields rose sharply Friday after the Federal Reserve said it wouldn't extend a temporary rule that encouraged banks to hold Treasurys, but then yields retreated as investors debated how significant the hit would be to debt markets.

The impending end of capital relief for banks was one factor behind the rising volatility in U.S. government debt markets in recent weeks, according to investors and analysts. They feared losing the ability to exclude Treasurys and deposits held at the central bank from a key measure of balance-sheet strength would hurt their ability to buy and sell Treasurys.