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NEW YORK, Aug 31 (Reuters) - Investors should consider shorting the U.S. 10-year inflation breakeven rate as domestic headline inflation likely reached its near-term peak and economic growth is projected to slow over the next 12 months, a HSBC bond strategist said on Friday.
The 10-year breakeven rate, or the yield spread between 10-year Treasury Inflation Protected Securities and regular 10-year Treasury notes, was 2.10 percent in early U.S. trading, down 1 basis point from late on Thursday, Tradeweb data showed.
“U.S. breakevens have performed strongly over the last 12 months, but we think the tide is turning,” Theologis Chapsalis, HSBC fixed income strategist wrote in a research note published on Friday.
Earlier this month, the Labor Department said the Consumer Price Index, the government’s broadest inflation gauge, rose 0.2 percent in July, propelled by rising rents. On a year-over-year basis, the CPI was up 2.9 percent.
The Congressional Budget Office, Chapsalis cited, expected the U.S. gross domestic product to cool near 1.7 percent in the 2023-2028 period from a forecast 3.1 percent in 2018. The growth slowdown will take inflation lower, he said.
Investors should take profit on the 10-year breakeven shorts when it falls to 1.95 percent and abandon the trade if it rises to 2.25 percent, Chapsalis said.
“The risk to the trade is a sustained rise in commodity prices and, in particular, oil,” he wrote. “Our base case is that the oil market appears balanced with exporters happy to increase output at current prices (for example Iraq).” (Reporting by Richard Leong Editing by Chizu Nomiyama and David Gregorio)