U.S. bond market's inflation gauge rises to six-month highs this week

NEW YORK, Aug 14 (Reuters) – The U.S. bond market’s gauge of investor inflation expectations this week rose to six-month highs, bolstered in part by data showing higher producer and consumer prices in July.

The yield spread, or inflation breakeven rate, between five-year Treasury Inflation Protected Securities (TIPS) and regular five-year Treasuries hit 1.565% on Thursday, the highest since February.

U.S. 10-year and 30-year breakevens touched 1.6618% and 1.7105% on Wednesday and Thursday, respectively. Both levels were six-month peaks.

Breakeven rates pared some of that move Friday as they came off their highs. .

“The last inflation report was pretty solid,” said Gennadiy Goldberg, senior rates strategist at TD Securities in New York. “But most of the rise in breakevens was due to the decline in real rates and that’s a function of the Federal Reserve’s quantitative easing.”

U.S. inflation indicators this week – producer and consumer prices – beat market expectations. Inflation levels remain broadly lower than those of the pre-pandemic period, however.

Inflation initially collapsed as the pandemic hit but has recovered quickly in recent months as central banks engaged in unprecedented easing, wrote analysts at Bank of America in a research note on Wednesday.

“The aggressive expansion of monetary and fiscal policy in the U.S. has led to fears of U.S. currency debasement and overshooting inflation,” the analysts wrote.

The Fed bought $134 billion of TIPS from March 16 to July, as part of its asset purchase program, pushing yields on TIPS lower, while holding nominal yields near zero.

Yields on U.S. TIPS have been negative since March. The benchmark U.S. 10-year TIPS yield was -0.952% on Friday.

Breakeven rates have been trending higher even before the CPI data. The 10-year breakeven, for instance, has been accelerating since hitting the pandemic low of 57 basis points in March. It’s headed toward the 2020 peak of 177 basis points touched in early January. (Reporting by Gertrude Chavez-Dreyfess)

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