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Market participants have observed that the expected December increase in the federal fund target rate is flattening the term structure of Treasury yields as investors shift from the short to the long end of the curve.  However, fewer market observers have noted that the same scenario is playing out on the volatility side.  As TYVIX continues to decrease, the expected volatility of shorter-dated Treasuries, such as one-year Treasuries, is rising, pushing the spread between the two volatilities to its lowest value for the year.

Figure 1.  Treasury volatility spreads versus yield spreads1

Figure 2.  Weekly update of volatility indexes2

Term structure of VIX-like futures on November 19, 2015

EUVIX, the volatility of the dollar/euro exchange rate, is bucking the trend and still on an upward path. This explains the persistent backwardation in its forward volatility.

Figure 3.  Term structure of futures 3