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NEW YORK (Reuters) - The U.S. bond market's gauges on inflation expectations suffered their worst day so far this year on Friday as government data showed consumer prices in April rose less than traders had expected, raising concerns over when domestic inflation would reach the Federal Reserve's 2 percent goal.
Treasury inflation-protected securities lagged regular Treasuries, which rallied as some traders reduced their TIPS holdings on worries they would be less profitable if inflation stalls, analysts said.
The U.S. Labor Department said on Friday its Consumer Price Index, the government's broadest inflation gauge, rose 0.2 percent in April, rebounding from a 0.3 percent fall in March. Last month's rise brought the year-over-year increase to 2.2 percent, slower than the 2.4 percent advance in March.
"Many participants given last month's outsized weakness perceived that we would get a meaningful payback today, but that turned out not to be the case," said Martin Hegarty, head of inflation-linked bond portfolios at BlackRock Inc (BLK.N), the world's biggest asset manager.
TIPS' principal and interest payments are benchmarked against the CPI, offering investors protection against a pickup in inflation.
TIPS account for 8.6 percent of $13.9 trillion U.S. Treasuries outstanding.
The CPI report followed stronger-than-forecast readings on import and producer prices earlier this week, which raised expectations of a solid rise in consumer inflation.
"I think there was a rush of buying that took place over the last 24 to 48 hours that is now under water. Those people are reassessing or liquidating as we head into the weekend," Hegarty said.
This week's rise in oil prices CLc1 also stoked buying of TIPS, analysts said.
The 10-year inflation breakeven rate, or the yield difference between 10-year TIPS and regular 10-year Treasuries, was 1.87 percent, down over 4 basis points from Thursday, Tradeweb data showed. US10YTIP=TWEB
It was the steepest one-day decline in the 10-year breakeven rate since Dec. 15, according to Reuters data.
The five-year breakeven rate tumbled to 1.76 percent, down 6.5 basis points, which was the biggest drop since last June. US5YTIP=TWEB
While the latest CPI report caught some traders off guard, some analysts said U.S. inflation remains on an upward trend, which makes TIPS a sensible long-term investment.
"Given mounting evidence of upstream cost pressures and labor market tightness, we believe it is unlikely that the trend in monthly core inflation has stepped down materially over the last two months," Goldman Sachs economists wrote in a research note.
Reporting by Richard Leong; Editing by Leslie Adler