US 10-year break-evens reach three-month low before TIPS sale

May 17 (Bloomberg) -- The difference between 10-year yields for conventional U.S. government debt and Treasury Inflation- Protected Securities was the smallest since January before a $13 billion auction of inflation-protected notes.

Treasury 10-year yields reached a seven-month low after the index of U.S. leading economic indicators unexpectedly fell in April and a regional manufacturing measure shrank in May. U.S. debt dropped earlier after a report showed Japan’s economy expanded faster than estimated in the first quarter. The TIPS sale may post a record negative yield.

“Given how the market is trading in nominal Treasuries, there’s a lot less inflationary pressure than there was a couple of months ago,” said Alex Li, an interest-rate strategist in New York at Deutsche Bank AG, one of 21 primary dealers that are required to bid at Treasury auctions.

The 10-year yield fell two basis points, or 0.02 percentage point, to 1.74 percent at 10:31 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent security due May 2022 gained 5/32, or $1.56 per $1,000 face amount, to 100 2/32.

U.S. 10-year yields reached the least since Oct. 4. It reached a record low 1.67 percent on Sept. 23 after a Group of 20 finance chiefs failed to ease concern the global economy was on the brink of another recession.

Inflation Adjustment

“The potential for continued global slowdown is still the story, and it limits any selloff in Treasuries,” said Sean Murphy, a trader in New York at Societe Generale SA, a primary dealer. “We’ve had a nice rally since last week and we are getting to a point where we will need a further catalyst to continue to move much lower in yield.”

The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, reached 2.06 percentage points, the least since Jan. 25. The average during the past decade is 2.15 percentage points.

The 10-year TIPS yield climbed three basis points to negative 0.36 percent. The Treasury’s $13 billion auction of 10- year TIPS on March 22 was priced at a record-low negative 0.089 percent yield.

The Fed’s preferred measure of gauging the outlook for inflation has declined from the almost-seven-month high it reached in March as U.S. economic data began to cool and Europe’s debt problems began to worsen. The five-year, five-year forward break-even rate, which projects the pace of consumer price increases starting in 2017, fell yesterday to a two-month low of 2.50 percent, down from 2.78 percent on March 19.

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