March trading activity in the US government bond market shows broad swings with no clear trend pointing to what will happen next.

Uncertainty about whether the Federal Reserve will hike or cut benchmark interest rates, the potential economic impacts of turmoil in the banking sector and the ever-changing prospects of a recession triggered one of the most volatile months in US Treasury yields in decades.

The US Treasury 2-year yield, which is closely aligned with the Fed's interest rate plans, settled as high as 5.05% on March 8 and as low as 3.76% on March 23, a 129-basis-point swing in about two weeks. Meanwhile, bond market volatility measured by the ICE BofAML Move Index reached its highest point since 2009 in March.

The unpredictability in the Treasury yields is set to persist for quite a while as the Fed's path forward remains unclear.

"I think we're going to see more volatility until we get a sense of what it's going to take to break inflation," said Jack McIntyre, a portfolio manager with Brandywine Global.

In early March, Fed Chairman Jerome Powell indicated that the central bank will potentially accelerate its push to hike rates as inflation remained stubbornly high, pushing up bond yields on expectations of even higher rates. But after the collapse of Silicon Valley Bank and fears of a looming credit crunch, the Fed on March 22 increased rates by only 25 basis points. It has boosted rates by 475 basis points since March 2022.

"The volatility in Treasury yields, especially at [the 2-year yield], is a reflection on a broad range of possible outcomes for Fed rates, from further hikes being needed to fight inflation to rapid cuts being necessary in case of a severe credit crunch … and with all the intermediate outcomes in between," said Antoine Bouvet, a rates strategist with ING.

Before Silicon Valley Bank failed, markets were pricing in further interest rate increases by the Fed and a resilient economy, said Kathy Jones, managing director and chief fixed-income strategist with the Schwab Center for Financial Research.

"After SVB and the Fed and Treasury programs to support liquidity in the markets, expectations have jumped all over," Jones said.

Portions of the Treasury yield curve, which have been more inverted than they have been since the early 1980s, show signs that they peaked in March with the Fed's rate hike push. Inversion, often seen as a sign of looming recession, occurs when shorter-dated bond yields climb higher than those for longer-dated debt.

"I do think we've seen maximum inversion of the yield curve," Schwab's Jones said. "The trend now is likely to be toward re-steepening, although with the volatility in short-term rates, it's likely to be choppy."

The curve has the tendency to "dis-invert" before the end of 2023 as regional banking troubles worsen a credit crunch, pushing the Fed to stop its hiking cycle, potentially by its May meeting, said Bouvet with ING. Rate cuts will likely arrive before year-end, Bouvet said.