May 16, 2017 / 7:35 PM / 8 months ago

U.S. TIPS breakeven rates fall to year's lows

NEW YORK, May 16 (Reuters) - The U.S. bond market’s gauges on inflation expectations fell on Tuesday to their lowest levels so far this year as traders further pared bets that domestic price growth would accelerate.

Traders began scaling back their bullish bets on Treasury Inflation Protected Securities (TIPS) on Friday in the wake of a government report that showed its Consumer Price Index rose less than what they had expected in April.

Worries that U.S. inflation would take longer than previously thought to reach the Federal Reserve’s 2 percent goal spurred selling in TIPS resulting in the sector’s worst day so far in 2017, analysts said.

The disappointing CPI report, however, was unlikely to deter the U.S. central bank from raising interest rates at least one more time this year, they said.

TIPS, while they have turned less profitable, are supported by the possibility of higher oil prices and Wall Street stocks which are hovering near record highs, they said.

“We stay neutral on breakevens in the near-term with tactical factors such as oil/equities favouring longs. But the active Fed and low inflation back-drop supports a bearish stance,” UBS head of U.S. rates strategy Chirag Mirani wrote in a research note.

In late trading, the 10-year TIPS inflation breakeven rate, or the yield difference between 10-year TIPS and regular 10-year Treasury notes, was last at 1.84 percent, down 1 basis point from Monday. It touched its lowest level in about six months, Tradeweb data showed.

The five-year breakeven rate declined over 1 basis point at 1.74 percent, its lowest level since mid-December, according to Reuters data.

Since March, falling crude prices, which hit five-month lows earlier in May, have put broad downward pressure on the CPI, against which TIPS payments to investors are benchmarked.

TIPS breakeven rates recovered briefly on Monday in step with higher oil futures on expectations major oil producers would extend production cuts to support prices. But their modest bounce faded on nagging concerns that the oversupply in oil would bog down inflation.

U.S. oil futures settled 0.4 percent lower at $48.66 a barrel on Tuesday following a 2.1 percent gain on Monday.

Reporting by Richard Leong; Editing by Chizu Nomiyama

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