May 2, 2018 / 7:54 PM / a year ago

UPDATE 1-U.S. TIPS breakeven rates rise on oil, no increase in supply

(Updates market action, adds quote)

NEW YORK, May 2 (Reuters) - The U.S. bond market’s gauges of investors’ inflation outlook rose on Wednesday as the government did not increase the supply of Treasury Inflation Protected Securities in a bid to fund a growing budget deficit.

Higher oil prices also bolstered investors’ inflation view as U.S. crude futures climbed near $68 a barrel after the Federal Reserve expressed confidence that the recent rise in domestic inflation would be sustained.

The Treasury Department on Wednesday chose for now not to sell another issue of five-year Treasury Inflation Protected Security later this year, which some analysts had expected.

Many analysts said the Treasury would opt for another five-year TIPS issue in the coming months.

The Treasury’s TIPS decision was part of its quarterly refunding where it will sell $73 billion in three-year, 10-year and 30-year debt next week, raising $33.9 billion in new cash.

“Given that this was the second refunding this year where coupons were increased, we think sooner or later TIPS sizes will need to go up,” George Goncalves, head of U.S. rates strategy at Nomura Securities International, wrote in a research note.

At the moment, the Treasury seemed to be leaning on selling more Treasury bills including the introduction of a two-month issue and increasing auction sizes of regular coupon-bearing securities to meet its funding needs, analysts said.

Goldman Sachs analysts projected a U.S. funding gap, or the gap between forecast finance needs and cash raised from current level of Treasury auctions, of about $330 billion for fiscal 2019 and roughly $850 billion by fiscal 2021.

In late Wednesday trading, the five-year inflation breakeven rate, or the yield gap between five-year Treasury Inflation Protected Securities and regular five-year Treasury notes, erased an earlier decline. It was 2.10 percent, up 1 basis point from late Tuesday, Tradeweb data showed.

The 10-year TIPS breakeven rate was 2.17 percent, up almost 1 basis point on the day.

U.S. crude futures settled up 68 cents or 1 percent at $67.93 a barrel. (Reporting by Richard Leong Editing by Chizu Nomiyama)

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