May 20, 2010 / 3:46 PM / 9 years ago

UPDATE 1-Deflation worries knock U.S. inflation bonds

(Recasts lead, updates market action, adds quote)

By Richard Leong

NEW YORK, May 20 (Reuters) - Europe’s debt woes and signs of an anemic U.S. job recovery stoked worries of deflation on Thursday, hurting the returns on U.S. Treasury Inflation-Protected Securities.

This week’s weaker-than-expected U.S. inflation data supported the view that inflation will not be an economic threat for a protracted period.

If anything, these data and worrisome development in the euro zone fan the risk of growing downward pressure on prices, which is also harmful to the economy, analysts said.

“The risk is skewed towards deflation right now,” said Dimitri Delis, fixed income strategist at BMO Capital Markets in Chicago.

The spread between U.S. 10-year TIPS and regular 10-year Treasury notes — a gauge of investors’ long-term price expectations — was last quoted at 1.92 percent after touching 1.89 percent earlier. It ended at 2.06 percent on Wednesday.

The 10-year breakevens is the smallest since 1.87 percent on Oct 13, 2009. It was 2.27 percent a week earlier, according to Reuters data. (Reporting by Richard Leong)

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