TIPS market to auger rising inflation - PIMCO

NEW YORK, Sept 24 (Reuters) - The Treasury Inflation Protected Securities (TIPS) market is likely to show inflation expectations rising through year end, a Pacific Investment Management Co fund manager said.

Break-even spreads between the nominal 10-year Treasury note yield and the equivalent TIPS should widen to near 250 basis points by December from about 230 basis points currently, John Brynjolfsson, a managing director at PIMCO, told a Euromoney conference on inflation-linked products in New York.

Widening break-even spreads reflect investors' rising inflation expectations.

Referring to the Federal Reserve's half-percentage-point interest rate cut on Sept. 18, and the possibility of more easing, Brynjolfsson said "the Fed, erring on the side of being excessively easy, will add to inflationary pressures."

The Fed might lose face with investors if the break-even spread were allowed to be exceptionally wide, Brynjolfsson said.

"As long as the Fed wants to maintain credibility, they have to keep below 250 basis points," he said, noting that the U.S. central bank's presumed comfort zone for core inflation lies between 1-2 percent.

The year-on-year core personal consumption expenditures index, one of the Fed's favorite measures of inflation, grew 1.9 percent in July.

He expects food and energy prices to continue rising and to put upward pressure on inflation over the long term as rapidly industrializing economies drive that trend.

"That totally discredits the idea of targeting core inflation," which excludes food and energy prices, he said.

When asked for his forecast for the nominal 10-year note yield over the next six to 12 months, Brynjolfsson said that it could move in a wide range between about 3.5 percent and 5 percent.

As of Monday afternoon the nominal 10-year yield US10YT=RR stood at 4.63 percent. (Reporting by John Parry in New York; editing by Jonathan Oatis; Reuters Messaging: john.parry.reuters.com@reuters.net; e-mail: john.parry@reuters.com; Tel.: 646 223 6303)