UPDATE 1-Signs of inflation lift U.S. TIPS breakeven rates

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NEW YORK, Jan 12 (Reuters) – The U.S. bond market’s gauges of inflation expectations rose on Friday as a stronger-than-forecast increase in core domestic consumer prices in December kindled bets that price pressure would reach the Federal Reserve’s 2 percent goal.

The core rate on the Consumer Price Index, a proxy on the underlying inflation trend that excludes volatile food and energy prices, grew 0.3 percent last month, which was the biggest monthly gain in 11 months. This brought its year-over-year increase to 1.8 percent.

The December core CPI reading was also stronger than the 0.2 percent rise forecast among analysts polled by Reuters.

Shortly after the latest CPI report, the 10-year inflation breakeven rate, or the yield gap between 10-year Treasury Inflation Protected Securities and regular 10-year Treasury notes, hit 2.05 percent, its highest level since March before subsiding to 2.03 percent, Tradeweb and Reuters data showed.

On Thursday, the 10-year breakeven rate ended at 2.02 percent.

“The breakeven levels are pricing in a greater expectation of increased inflationary pressure. They have had a nice run since the middle of December and will need to see a continuation of inflationary pressures to sustain current levels,” said Sean Simko, senior portfolio manager at SEI in Oaks, Pennsylvania.

Friday’s rise in breakeven rates was limited by a pullback in oil prices with U.S. crude futures retreating from $64.77 a barrel set on Thursday, which was the highest level since late 2014.

Reporting by Richard Leong

Source: Reuters

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