The Treasury Department Will Struggle To Sustain March's Returns

In the midst of the regional banking crisis, investors have been seeking safety in Treasuries, which have had an exceptionally strong run through March.

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As reported by ICE Indices, the two-year Treasury bond, TMUBMUSD02Y - 3.01%, generated a return of 1.68 %, including the interest payments.

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The exchange-traded fund or ETF (ticker: SHY) iShares 1-3 Year Treasury BondsSHY +0.23% returned 1.65% over the same period.

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Nevertheless, you shouldn't expect that the pace of the upswing in Treasuries that took place in March will continue.

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It would be unlikely, if not impossible, for the two-year note to continue to perform as well as it did in March throughout the rest of the year, according to Martin Fridson, chief investment officer at Lehmann Livian Fridson.

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It is worth mentioning that Peter Baden, chief investment officer at Genoa Asset Management, has pointed out that an annual return of 10.5% with a compounded monthly return of 1.68% would yield a monthly return of 1.68% over the year. However, he does not predict that level of performance in the rest of 2023.

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Taking into consideration that we do see a yield of 4% on the two-year Treasury, it could be a great way to weather the volatility of a possible hard landing, says Paik, who refers to the two-year Treasury as a very good ‘safe harbor’.

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A mid- and high-single-digit return has been achieved by this investment security over the past few years.

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As rates spiked last year as the Federal Reserve's aggressive tightening program hit the market, this year's benchmark bond yield depressed to 4.2%, which is considered an outlier within the overall bond index. Bonds struggled across the board last year, as interest rates spiked thanks to the Federal Reserve's aggressive tightening program.

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Treasuries with a two-year maturity returned 3.03 percent in 2020, while they returned minus 0.53% the following year.

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In March, Fridson highlights the fact that the two-year Treasury's yield plunged by 76 basis points, or approximately three-quarters of a percentage point, to 4.04% from 4.8%, signaling a downward move in the two-year Treasury price. Bond yields follow the direction of bond prices.

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There is a possibility that the two-year Treasury would drop by 76 basis points each month for the rest of the year, which would result in a two-year Treasury yield of minus 2.8% --a prospect called unlikely by Fridson.

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Based on Fridson's calculations, the August return of 1.68% was more than double the monthly mean of 0.31% dating back to 1988, and it was the highest monthly return since July 2002, when it reached 1.725%.

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Last month, the 10-year Treasury TY00 +0.64% was able to produce one of its strongest performances, returning 3.86%, which was very impressive.

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