November 21, 2018 / 3:52 PM / 5 months ago

CORRECTED-UPDATE 1-U.S. TIPS breakeven rates fall ahead of auction

(In paragraph 6, corrects auction time to 11:30 a.m. from 1 p.m.)

NEW YORK, Nov 21 (Reuters) - The U.S. bond market’s gauges on investors’ inflation expectations declined on Wednesday, testing their lowest levels in at least 10 months, in advance of an $11 billion sale of 10-year Treasury Inflation Protected Securities.

Earlier, inflation breakeven rates, or the yield spreads between TIPS and regular Treasuries, were higher as domestic oil prices rebounded from their lowest in more than a year.

TIPS breakeven rates have fallen on worries about slowing global economic growth and sagging oil prices.

Analysts projected decent demand for the latest 10-year TIPS supply despite a weakening outlook on inflation as the 10-year TIPS yield, which is hovering at its highest in more than seven years, would entice income-oriented investors.

“That attractiveness on an outright basis will likely inspire buying at a liquidity point in one of the more illiquid Treasury securities,” BMO Capital Markets U.S. rates analyst Ben Jeffery wrote in a research note.

In “when issued” activity, traders expected the upcoming 10-year TIPS offering at 11:30 a.m. (1630 GMT) to sell at a yield of 1.106 percent, Tradeweb data showed.

On the open market, the 10-year TIPS breakeven rate was 1.977 percent, down 0.6 basis point from late Tuesday, according to Tradeweb data. On Tuesday, this margin contracted to its tightest level since early January.

The five-year breakeven rate was 0.65 basis point lower at 1.826 percent after touching 1.823 percent earlier Wednesday, which was its lowest level since Dec. 28. (Reporting by Richard Leong Editing by Chizu Nomiyama and David Gregorio)

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