March 14, 2017 / 1:48 PM / in 9 months

UPDATE 1-U.S. TIPS breakeven rates fall with oil prices

(Updates trading, adds background)

NEW YORK, March 14 (Reuters) - The U.S. bond market’s gauges on inflation expectations fell on Tuesday, in line with weaker oil prices due to growing domestic inventory and little evidence OPEC will extend its output curb beyond June.

The decline in the inflation expectation breakeven rates, or the yield differences between Treasury Inflation Protected Securities (TIPS) and regular Treasuries, was stemmed after data showed producer prices rose more than forecast in February, supporting the view of faster domestic inflation.

Further signs of inflation perking up may spur the Federal Reserve to quicken its pace of interest rate increases in 2017.

Fed policymakers will hold a two-day policy meeting that ends on Wednesday. Economists unanimously expect the Fed to raise interest rates by a quarter point to 0.75-1.00 percent, according to a Reuters poll on Friday.

In early trading, the 10-year inflation breakeven rate was at 1.99 percent, 2.5 basis points lower than late on Monday, while the five-year breakeven rate was down over 2 basis points at 1.97 percent after hitting its lowest level in a month, Reuters and Tradeweb data showed.

U.S. crude futures dropped nearly 2 percent to $47.50 a barrel after falling to their lowest since Nov. 29.

While energy prices have weakened on supply concerns in recent days, they rose last month, pushing up overall costs on the producer level.

The government said on Tuesday its producer price index inched up 0.3 percent in February, slower than the 0.6 percent rise in January but faster than the 0.1 percent increase forecast of analysts polled by Reuters. (Reporting by Richard Leong; Editing by Bernadette Baum)

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