Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

It’s hard to keep track of the bond market’s mood swings.

One minute, traders are panicking about the possibility of the Federal Reserve raising interest rates for the first time in almost a decade. Wait a minute more, and everyone’s feeling sanguine about it, even as the Fed gets closer to the day of reckoning.

Right now, a level of calm has settled over debt and currency markets even as futures traders price in a 66 percent chance the Fed will make a move next month. A measure of implied volatility in Treasuries fell this week to the lowest level this year. Even in currencies, gauges of future price swings have fallen back below the 10-year average.

Feeling Good
A measure of Treasury volatility is declining as the Federal Reserve prepares to raise rates.
Source: Bank of America Merrill Lynch

Not to be alarmist, but the transition is likely to be rockier than fixed-income markets are suggesting. Yes, the Fed will probably kick rates up just a mere 0.25 percentage point, or possibly even less, which sounds relatively insignificant. Still, this is a big shift when juxtaposed with the negative deposit-rate policies of the European Central Bank and general easing around the world.

Opposite Direction
Yields are diverging between U.S. Treasuries and European debt.
Source: Bloomberg

Already there’s been a historic divergence between yields on U.S. government bonds, which are generally rising, and those on European debt, which are generally falling. The gap between yields on five-year Treasuries and similarly-dated German notes has widened to 1.8 percentage points, the biggest divergence since 1999. While two-year U.S. yields are near their highest since 2010, Germany just sold two-year notes with a record-low yield of negative 0.38 percent. 

That, by itself, doesn’t necessarily portend a rocky road ahead for U.S. debt markets. What’s more concerning are small distortions in markets that grease the wheels of the financial system, such as inverted interest-rate swap spreads. There are questions over how, exactly, the Fed will raise rates, in a world flooded with cash. 

Meanwhile, trading in U.S. Treasuries has generally been declining, with volumes this year averaging $496 billion a day compared with $505 billion on average last year and $547 billion in 2013, according to Fed data tracking activity at primary dealers.

With less activity, it’s easier for one big seller (or buyer) to cause larger ripples throughout the market. This will especially be the case in December, when traders are heading off on vacations and taking chips off the table rather than reconfiguring their portfolios.

While there may not be a Bond-a-geddon if -- more likely when -- the Fed acts in December, it’ll probably be a volatile period, more so than fixed-income markets are now suggesting.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at

To contact the editor responsible for this story:
Daniel Niemi at