Tips breakeven rates fall as Turkey woes overshadow CPI data

NEW YORK The US bond market's main gauge of inflation outlook among investors fell on Friday last week as worries about Turkey's economy overshadowed data that showed further improvement in the underlying domestic inflation trend.

US President Donald Trump's move to slap higher duties on Turkish steel and aluminium widened the rift between Washington and its Nato ally. This exacerbated investors' jitters about Turkish President Tayyip Erdogan's policies to deal with an economy saddled by double-digit inflation.

The plunge of the Turkish lira on Friday last week, in its biggest one-day loss since Turkey adopted a floating currency regime in 2001, spooked investors who flocked into US Treasuries, dollar and other perceived safe-haven assets.

During market turbulence, Treasury Inflation Protected Securities, or Tips, often underperform regular or nominal Treasuries.

Still, analysts were encouraged by last month's report on the consumer price index (CPI). The CPI core rate that excludes volatile food and energy prices grew at an annual rate of 2.4 per cent, the strongest reading since September 2008.

The 10-year Tips breakeven rate was 2.1 per cent, more than one basis point lower than Thursday and near a three-week low.

Tips breakeven rates reached near four-year peaks back in May.

A firming inflation backdrop was not enough to push the Tips market higher. The sector has been bogged down by expectations that inflation data would soften in the latter half of the year and by withdrawals from Tips exchange-traded funds, said senior inflation strategist Com Crocker.

Year-to-date, Tips have produced a loss of 0.44 per cent, less than a 1.32 per cent loss on nominal Treasuries, according to indexes compiled by Bloomberg and Barclays. - REUTERS