Lede

The $24 trillion Treasury bond market experienced unprecedented levels of volatility in March, with daily moves in the 2-year yield averaging around 50 basis points, likely due to fears of instability in the U.S. banking system and poor liquidity.

Summary

• Recent volatility in the Treasury bond market was likely caused by fears of instability in the U.S. banking system and poor liquidity, according to LPL Research.
• During the most erratic trading days in March, the 2-year yield swung an average of 50 basis points between its highs and lows each day, with moves of only a few basis points being more typical.
• The 2-year Treasury rate reached a one-year high of 5.064% on March 8th, just days before the collapses of Silicon Valley Bank and Signature Bank.
• The Federal Reserve responded to banking jitters by introducing an emergency facility for banks to tap for liquidity, with the aim of preventing forced sales of “safe” assets, including low-coupon Treasury and agency mortgage-backed securities that have fallen in value.
• By the end of March, concerns about the banking system had subsided, with U.S. stocks posting monthly gains.
• Traders in fed-funds futures slightly favored another Fed rate hike in May, of 25 basis points to a 5%-5.25% range, after pushing up the odds of no increase to around 60% the week prior.
• The LPL team advised investors to take advantage of any backup in yields and add high-quality fixed-income exposure.