U.S. TIPS breakeven rates fall to lowest since December

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NEW YORK, April 17 (Reuters) - The U.S. bond market's gauges on inflation expectations on Monday fell to their lowest levels since December, signaling investors are scaling back bets the Federal Reserve might raise interest rates faster.

A drop in oil futures prices and a surprise drop in the government's consumer price index (CPI) in March put pressure on inflation "breakeven" rates, which are the yield differences between Treasury Inflation Protected Securities (TIPS) and regular U.S. government debt.

A pullback in inflation expectations coincides with a fading view about faster U.S. economic growth due to possible tax cuts and infrastructure spending from Washington, analysts said.

"We have been cautious on TIPS breakevens, especially front-end, for a few weeks now as we believed that once we cleared CPI base-effects from oil and general reflation theme fades as it largely has in bond market that (breakeven rates) would reprice and get dragged lower by the rally," said George Goncalves, head of U.S. rates at Nomura Securities International in New York.

On Friday, the government said the CPI declined 0.3 percent in March, the first fall in 13 months and biggest decrease since January 2015 due to lower prices for gasoline and mobile phone services, which offset rising rents and food costs.

TIPS' principal and interest payments are benchmarked against the CPI.

Still money has continued pouring into TIPS-focused funds, underpinned by the notion inflation could accelerate in a faster-growing economy under U.S. President Donald Trump and a Republican-controlled Congress.

In the week ended April 12, TIP fund assets grew to $61.89 billion, down from $61.93 billion in the previous week but up from $56.83 billion at the end of 2016, according to Lipper, a unit of Thomson Reuters.

The 10-year inflation breakeven rate, or the yield difference between 10-year Treasury Inflation Protected Securities and regular 10-year Treasury notes, was last at 1.89 percent, down 3 basis points from Thursday. It touched 1.88 percent earlier Monday, which was the lowest since Dec. 20, Tradeweb and Reuters data showed.

U.S. financial markets were closed for the Good Friday holiday.

The five-year TIPS breakeven rate fell over 5 basis points at 1.81 percent after touching 1.79 percent which was the lowest since Dec. 20.

U.S. oil futures settled down 53 cents or 1 percent at $52.65 a barrel.

(Reporting by Richard Leong; Editing by Chizu Nomiyama and Cynthia Osterman)