January 5, 2018 / 2:55 PM / a year ago

UPDATE 2-U.S. TIPS breakeven rates rise on hopes of faster wage growth

(Updates market action, adds graphic)

NEW YORK, Jan 5 (Reuters) - The U.S. bond market’s gauges of inflation expectations rose on Friday to their highest levels since at least April on expectations of a pick-up in wage growth in 2018 following the government’s payrolls report.

The U.S. Labor Department said earlier Friday average hourly earnings grew 0.3 percent in December, matching analyst expectations and bringing their year-over-year increase to 2.5 percent.

The earnings increase came before passage of the biggest tax overhaul in 30 years late last month, which some analysts and investors reckon may spark a pick-up in wage inflation.

“The market thinks this number is not super relevant because this was before tax reform, related salary increases and bonuses. We could see some traction in wage inflation in the next three to six months,” said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors LLC in Minneapolis.

The in-line wage increase offset a smaller-than-forecast 148,000 rise in nonfarm payrolls due to a sharp decline in retail jobs.

Underlying domestic inflation has remained stuck below the Federal Reserve’s 2-percent goal despite a tightening labor market.

The 10-year inflation breakeven rate, or the yield gap between 10-year Treasury Inflation Protected Securities and regular 10-year Treasury notes, rose to 2.03 percent, up 2 basis points from Thursday. This was the closing level on the 10-year TIPS breakeven rate since March, Tradeweb data showed.

The five-year TIPS breakeven rate ended up 2.5 basis points at 1.94 percent, which was the highest closing levels since last April.

The 30-year breakeven rate finished over 1 basis point at 2.06 percent, the highest closing level since last April.

TIPS breakeven rates have risen in recent days in step with a spike in commodity prices with oil futures reaching their highest since May 2015 earlier this week.

Reporting by Richard Leong; Editing by Chizu Nomiyama and Tom Brown

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