January 21, 2015 / 8:44 PM / 3 years ago

UPDATE 1-U.S. TIPS breakeven rates rise on central bank moves

NEW YORK, Jan 21 (Reuters) - The U.S. bond market’s measures on inflation expectations rose on Wednesday following a surprise interest rate cut from the Bank of Canada and reports that the European Central Bank would embark on a large stimulus plan.

Analysts and traders reckoned these central-bank moves would counter the growing deflation risk from falling oil prices and soft global demand.

Higher oil prices further reduced concerns about disinflationary pressure intensifying. In New York, U.S. crude futures settled up $1.31 or 2.8 percent at $47.78 a barrel.

The ECB Executive Board has proposed a program that would enable the central bank to buy 50 billion euros ($58 billion) in bonds a month starting in March, in an effort to stop deflation from spreading across the region, a euro zone source said on Wednesday.

ECB policymakers will hold a meeting on Thursday.

Meanwhile, the Bank of Canada stunned markets by lowering policy rates by a quarter point to 0.75 percent on concerns the steep drop in oil prices would hurt its economy whose growth has been supported by the energy sector.

This comes after the Swiss National Bank and Danish central bank cut policy rates deeper into negative territory in recent days.

“Most central banks would probably like to see a bigger bang for their policy actions going forward to be more effective,” said Alan Wilde, head of fixed income and currency at Baring Asset Management in London.

These policy measures are intended to ward off downward pressures in the economy by stoking credit demand and stock and home prices, analysts said.

The five-year TIPS breakeven rate, which measures investors’ short-term inflation expectations, was 1.22 percent in late trading, up nearly 2 basis point from late on Tuesday. Earlier the five-year breakeven rate reached 1.24 percent, the highest in nearly six weeks, according to Tradeweb.

The 10-year TIPS inflation breakeven rate, a gauge of investors’ longer-term inflation outlook, was last 1.61 percent, up 1.5 basis points on the day. It earlier touched 1.64 percent, the highest in three weeks.

Reporting by Richard Leong; Editing by Alden Bentley and Chizu Nomiyama

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