August 10, 2018 / 7:10 PM / in 8 months

UPDATE 1-U.S. TIPS breakeven rates fall as Turkey woes overshadow CPI data

(Updates market action, adds quote, graphic)

By Richard Leong

NEW YORK, Aug 10 (Reuters) - TIPS, the U.S. bond market’s main gauge of the inflation outlook among investors, fell on Friday as worries about Turkey’s economy overshadowed data that showed further improvement in the underlying domestic inflation trend.

U.S. President Donald Trump’s move to slap higher duties on Turkish steel and aluminum on Friday 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, in its biggest one-day loss since Turkey adopted a floating-currency regime in 2001, spooked investors who flocked into U.S. Treasuries, dollar and other perceived safe-haven assets.

In times of market turbulence, Treasury Inflation Protected Securities (TIPS) often underperform regular or nominal Treasuries.

Still analysts were encouraged by July report on the consumer price index. The CPI core rate that excludes volatile food and energy prices grew at an annual rate of 2.4 percent, the strongest reading since September 2008.

“There’s a lot of underlying strength in today’s CPI report,” said Com Crocker, senior inflation strategist at New Century Advisors based in Chevy Chase, Maryland.

At 3:04 p.m. (1903 GMT), the yield spread between five-year TIPS and regular five-year Treasuries, or the 10-year inflation breakeven rate, was 1.98 percent, flat from late Thursday. Earlier Friday, the five-year TIPS breakeven rate hit 1.97 percent, the lowest in about six months, according to Tradeweb and Reuters data.

The 10-year TIPS breakeven rate was 2.10 percent, 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, Crocker said.

“TIPS have languished this summer due to negative seasonals and outflows from TIPS ETFs,” he said.

TIPS mutual funds and ETFs experienced outflows for a third straight week. Their assets fell by nearly $155 million to $79.94 billion in the week ended Aug. 8, according to Lipper, a Thomson Reuters unit.

“TIPS funds are still outperforming nominal Treasury funds, but they are not getting retail investors that excited,” Crocker said.

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

Reporting by Richard Leong; Editing by Steve Orlofsky and Tom Brown

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