March 23, 2017 / 7:19 PM / 4 months ago

UPDATE 1-U.S. 10-year TIPS breakeven rates hover near 2-month lows after auction

3 Min Read

(Updates market action after 10-year TIPS sale)

NEW YORK, March 23 (Reuters) - The U.S. bond market's gauges on 10-year inflation expectations hovered near their lowest in more than two months on Thursday following a fair $11 billion auction of 10-year Treasury Inflation Protection Securities.

Investors' outlook on domestic inflation has softened this week as oil futures slid to four-month lows, prompted by concerns that output curbs led by OPEC have not dented record U.S. crude stockpiles.

Doubts that U.S. President Donald Trump and leading Republican lawmakers can quickly enact tax cuts, deregulation and infrastructure spending also dampened a view that inflation will accelerate from its current modest pace.

Top Republicans are struggling to secure votes to start dismantling the Affordable Care Act in the House of Representatives.

Worries that U.S. fiscal stimuli will be stalled have rattled stock markets and knocked down prices across risky assets this week, raising concerns investors will discard their bullish bets on faster U.S. economic growth that were triggered by Trump's presidential win.

"The risk remains that the larger reflation trade will unwind with the market likely to reprice sharply in the medium-term if Trump and Congress fail to pass anything meaningful in the next few days," BMO Capital interest rates strategist Aaron Kohli wrote in a research note.

Amid concerns about low inflation, investors purchased nearly 80 percent of the latest 10-year TIPS offering on Thursday with direct bidders awarded their largest share since November 2013.

"The buyside put in another strong performance in this auction, specifically direct bidders," said Thomas Simons, senior money market economist at Jefferies LLC in New York.

In Thursday afternoon trading, the 10-year inflation breakeven rate, or the yield difference between 10-year Treasury Inflation Protected Securities and regular 10-year Treasury notes, was 1.97 percent, less than 1 basis point lower than Wednesday's close, Tradeweb data showed.

The 10-year TIPS breakeven rate hit 1.95 percent on Wednesday, the lowest since Jan. 17, according to Reuters data.

The five-year TIPS breakeven rate was 1.96 percent, down 1 basis point on the day, while the 30-year breakeven rate gained 1 basis point at 2.07 percent after hitting a three-month trough on Wednesday.

In the energy market, U.S. oil futures settled down 0.7 percent at $47.70 a barrel after declining to $47.01 on Wednesday, the lowest since Nov. 14. (Reporting by Richard Leong; Editing by Bernadette Baum and Chizu Nomiyama)

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