June 19, 2019 / 9:37 PM / 7 months ago

U.S. bond market's inflation gauges rise as Fed hints at rate cuts

NEW YORK (Reuters) - The U.S. bond market’s gauges of investors’ inflation views climbed on Wednesday as the Federal Reserve signalled it may lower interest rates later this year to counter slowing global growth and sluggish domestic inflation.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., June 19, 2019. REUTERS/Brendan McDermid

Recent figures have pointed to price growth retreating from the central bank’s 2% goal, pressuring the market’s long-term inflation gauges to their weakest levels since the fall of 2016.

Last week, the University of Michigan said its gauge on consumers’ long-term inflation outlook fell to 2.2% in early June, the lowest since it began seeking responses on this aspect 40 years ago.

“Inflation is falling away from their target,” said Robert Tipp, chief investment strategist at PGIM Fixed Income in Newark, New Jersey.

(For a graphic on 'U.S. inflation gauges', click tmsnrt.rs/2X90Cco)

Investors’ inflation expectations, which are closely watched by Fed officials, have tumbled since early May, as the U.S.-China trade conflict has intensified after the Trump administration said Beijing backpedaled on terms it had previously agreed on.

Worries about a trade war between the world’s two biggest economies have roiled financial markets and led economists and policymakers to lower their inflation outlook.

On Wednesday, nearly half of the U.S. central bank’s 17 policymakers showed a willingness to lower borrowing costs over the next six months, and Fed Chairman Jerome Powell said that even those who do not see a rate cut as the likeliest outcome “agree the case for additional accommodation had strengthened” since the last policy meeting in May.

The Fed’s shift toward policy easing came a day after European Central Bank President Mario Draghi’s comments about the possibility of stimulus to bolster inflation in the euro zone.

In late U.S. trading, the yield spread between 10-year Treasury Inflation Protected Securities and regular 10-year Treasuries was 1.688%, up nearly 5 basis points from late on Tuesday, according to Tradeweb data.

The 10-year breakeven rate hit 1.614% on Monday, which was the lowest since September 2016.

The Fed’s move on Wednesday will likely help stabilize inflation breakeven rates, Tipp said.

(For a graphic on 'U.S. 5-year, 5-year forward breakeven inflation rate interactive', click here tmsnrt.rs/2PdzVzO)

Reporting by Richard Leong; Editing by Richard Chang

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