Markets

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

Well, she did it. 

Federal Reserve Chair Janet Yellen just raised U.S. interest rates for the first time since 2006. It was a historic move, and she somehow managed to make it almost a nonevent for markets, at least initially.

Look at how unfazed bond traders were. Here's Wednesday's activity in an exchange-traded fund focused on Treasury bonds maturing in one to three years:

Searching for Direction
Traders struggled to decide how they felt about short-term U.S. debt.
Source: Bloomberg
Intraday times are displayed in ET.

 Here are prices on the biggest junk-bond exchange-traded fund:

Optimistic Moves
Shares of the biggest junk-bond ETF actually rose after the Fed's announcement.
Source: Bloomberg
Intraday times are displayed in ET

 And here's the initial rally in shares of BlackRock's $4.6 billion emerging-markets debt ETF:

Risk On
An ETF focused on dollar-denominated emerging markets bonds rallied.
Source: Bloomberg
Intraday times are displayed in ET.

That's the good news. Here's the bad news: Fed officials have a lot of work to do to convince markets that everything is going to be just fine. Because there are some ominous signs that have respected thinkers, from DoubleLine's Jeffrey Gundlach to former Treasury Secretary Larry Summers, rather worried. They see a greater chance of the U.S. sinking into a dangerous, slowing spiral that ends with recession.

Credit derivatives are pricing in a 2008-style selloff within the next five years, as Bloomberg's Tracy Alloway points out here. That doesn't really jibe with the Fed's forecast for a long-run funds rate of 3.5 percent.

Yellen addressed some of the recent declines in high-yield credit during a question-and-answer session Wednesday, attributing some of the losses to lower oil prices. However, she emphasized that "financial conditions are supportive of economic growth,'' and, "we have a much more resilient financial system now than we had before the financial crisis."

That's a good start. She's starting to get the hang of it.

The cheerleading needs to be broad and consistent. For example, the Fed must convince markets that the U.S. is, indeed, stronger, and that this bodes well for the rest of the world. That includes developing economies, some of which have been faltering.

"The U.S. economy is a source of strength to emerging markets,'' Yellen said Wednesday. "There are positive spillovers from a strong U.S. economy.'' 

Can I get a Fed pyramid? Anyone?

So Fed policy makers, you did well. Now comes the challenge of convincing traders that the American economy is really on its way up, heading toward an era of prosperity and true, fundamental growth. This will be a psychological game. Main Street and Wall Street both need to believe in progress for it to become a reality.

The debt markets aren't so sure yet. It's time for the Fed to get its rah-rah on.

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 labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net