Bond Banking Aftershock

All the banking turmoil—both real and perceived—sent waves through the bond market. Two-year U.S. treasury bonds experienced a 1.2% rate drop over five trading days. Depending on how you look at it, this was the largest decline in rates since 1987, or the biggest short-term gain for investors holding government bonds in their portfolios. Traders reported that the markets had snarled, causing buyers and sellers to wait minutes between transactions.

The strong rally in government bonds will probably last as long as investors are nervous about the safety and soundness of the financial system, which could be days, weeks or months, depending on the headlines. Meanwhile, the bond parts of diversified portfolios gained value as stock prices declined, which is precisely the offsetting behavior that one would want to happen in uncertain markets.



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