NEW YORK May 16 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)