After an exceptionally strong run in March, Treasuries were a source of safety amid the regional-banking crisis for investors. It likely won’t last.
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Treasuries had an exceptionally strong run in March as investors sought safety amid the regional-banking crisis.
The
two-year Treasury
returned 1.68%, including interest payments, according to ICE Indices.
The
iShares 1-3 Year Treasury Bond
exchange-traded fund (ticker: SHY) returned 1.65%.
But don’t expect the pace of March’s upswing to persist for Treasuries.
Martin Fridson, chief investment officer at Lehmann Livian Fridson, says the likelihood of the two-year note sustaining its March performance for the rest of the year is “unlikely if not impossible.”
Peter Baden, chief investment officer at Genoa Asset Management, points out that a 1.68% monthly return for the rest of the year would result in an annual result of 10.5%. But he doesn’t expect that level of monthly returns for the rest of 2023.
“What we do see is a satisfactory 4% yield that can be a great place to ride out the volatility of a potential hard landing,” he says, referring to the two-year Treasury.
That security has had some solid mid- and high-single-digit annual returns.
In 2008, amid the Great Financial Crisis, it returned 7.4%. But last year, as interest rates spiked thanks to the Federal Reserve’s aggressive tightening program, it lost 4.2%—though that result was an outlier. Bonds struggled across the board last year.
Two-year Treasuries returned 3.03% in 2020 and minus 0.53% the following year.
Fridson points out that the two-year Treasury’s yield plummeted by 76 basis points, or about three-quarters of a percentage point, in March to 4.04% from 4.8%. Bond yields and prices move inversely.
If that security’s yield fell by 76 basis points each month for the rest of the year, it would leave the two-year Treasury at minus 2.8%—a prospect Fridson calls “hardly likely.”
Last month’s return of 1.68% easily topped the mean monthly result of 0.31% dating to 1988 and was the highest since 1.725% in July 2002, according to Fridson.
Meanwhile, the
10-year Treasury
turned in a very strong performance last month, returning 3.86%.
Corrections & amplifications: March’s 1.68% return for the two-year Treasury was its best monthly result since July 2002. An earlier version of this article incorrectly said it was the best performance since last July.
Write to Lawrence C. Strauss at [email protected]
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