U.S. Treasury yields tumbled in March as banking-sector woes roiled markets, with two-year rates potentially seeing their biggest monthly drop since 2008.
The yield on the two-year Treasury note finished Thursday at 4.097%, down 69.8 basis points so far in March, putting it on pace for its biggest monthly decline since January 2008 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.
Two-year Treasurys “rallied unimaginable amounts in the middle of the month,” said Michael Kushma, chief investment officer of broad markets fixed income at Morgan Stanley Investment Management, in a phone interview.
Around mid-March, the Federal Reserve announced an emergency bank term funding program after the sudden collapse of California’s Silicon Valley Bank and New York’s Signature Bank. The run on Silicon Valley Bank had sparked contagion fears, prompting the Fed to create a new program to help banks meet the needs of their depositors and shore up confidence in the banking system.
Treasury yields sank amid the regional banking tumult, with investors questioning whether the Fed would keep hiking interest rate hikes to battle high inflation. As financial stability concerns rose, traders in the fed-funds futures market began betting on potential rate cuts later this year.
The bond market was worried that banking-sector issues heightened the risk of recession, with the potential for constrained lending to hurt the U.S. economy, said Kushma, pointing to the recent drop in two-year Treasury yields.
It’s been a volatile month for shorter-term maturities, which he said are more sensitive to what the Fed might do with its monetary policy in the next three to six months.
Two-year Treasury yields had swung higher prior to the bank failures, continuing their rise after Fed Chair Jerome Powell’s congressional testimony on monetary policy on March 7 had a hawkish tone. But they reversed course later this month, falling from their 52-week high of 5.064% on March 8, according to Dow Jones Market Data.
The yield on the two-year Treasury note TMUBMUSD02Y, 4.076% was little changed around midday Friday at around 4.11%, after the Fed’s preferred inflation gauge showed signs of softening, according to FactSet data, at last check. Meanwhile, 10-year Treasury yields TMUBMUSD10Y, 3.510% were down about three basis points at 3.52% around midday.
Longer-term 10-yields have been “stuck in a range” for a while, said Kushma.
While two-year yields were on track for their biggest monthly drop in more than a decade, 10-year yields in March were heading for their largest monthly decline since November based on 3 p.m. Eastern time levels, according to preliminary findings Thursday from Dow Jones Market Data.
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