(Recasts, adds quotes)
By Richard Leong
NEW YORK Dec 15 Investors who are bullish on
U.S. inflation bonds are sticking to their bets in the wake of
the Federal Reserve's latest interest rate increase and a report
that showed domestic price growth cooled in November.
A surging dollar and a drop in oil prices on Thursday caused
some traders to pare their holdings of Treasury
Inflation-Protected Securities, which have been on a tear since
Donald Trump's U.S. presidential win on Nov. 8.
"It is still an incredibly under-owned asset class," said
Martin Hegarty, head of inflation-linked bond portfolios at
BlackRock Inc in New York, the world's biggest asset
TIPS, stocks and other risky assets have rallied on bets on
faster U.S. growth and inflation under a Trump administration
and a Republican-controlled Congress.
Rising oil prices following a deal among major oil producers
to cut output have also stoked the appetite for TIPS.
From mid-October to end-November, assets in TIPS-focused
funds grew by $3.47 billion to $56.42 billion, which was the
highest since April 2013, according to Lipper, a Thomson Reuters
TIPS funds, however, saw minor outflows last week, worth
$63.5 million, Lipper data showed.
Since a dramatic bond market selloff following the U.S.
election, TIPS have produced a negative return of 2.74 percent,
compared with a negative return of 3.24 percent on regular
Treasuries, indexes compiled by Barclays and Bloomberg showed.
On Thursday, inflation expectations weakened to their lowest
levels in more than a week as the government's Consumer Price
Index rose at a slower pace in November than October.
Fed policy-makers hinted a day earlier they expected a
possible three rate increases in 2017, one more than some
traders had expected. Perception of a faster pace of rate hikes
also reduced inflation expectations.
The 10-year inflation breakeven rate, or the
yield difference between 10-year TIPS and
regular 10-year Treasuries, fell to 1.92 percent,
which was the lowest since Dec. 5, Reuters and Tradeweb data
The 10-year TIPS breakeven rate reached 2.03 percent, its
highest since September 2014.
While negative news such as Thursday's CPI report would lead
to profit-taking in TIPS, they are expected to fare better than
regular Treasuries in the coming year, analysts said.
"Breakevens may become more volatile, but should continue to
ascend," Wells Fargo Securities analysts wrote in a research
note on Thursday. "We expect TIPS to outperform nominal
Treasuries in 2017."
(Reporting by Richard Leong; Editing by Chizu Nomiyama and