* Dec core CPI marks biggest monthly increase in 11 months
* TIPS funds see biggest weekly inflows since Nov. - Lipper
* U.S. to sell $13 bln 10-year TIPS next Thursday
(Updates market action, adds Lipper data)
By Richard Leong
NEW YORK, Jan 12 (Reuters) - The U.S. bond market's gauges of inflation expectations rose on Friday as a stronger-than-forecast increase in core domestic consumer prices in December kindled bets that inflation would reach the Federal Reserve's 2 percent goal.
The core rate on the Consumer Price Index, a proxy on the underlying inflation trend that excludes volatile food and energy prices, grew 0.3 percent last month, which was the biggest monthly gain in 11 months. This brought its year-over-year increase to 1.8 percent. The December core CPI reading was also stronger than the 0.2 percent rise forecast among analysts polled by Reuters.
Shortly after the latest CPI report, the 10-year inflation breakeven rate, or the yield gap between 10-year Treasury Inflation Protected Securities and regular 10-year Treasury notes, hit 2.05 percent, its highest level since March, Tradeweb and Reuters data showed. The 10-year breakeven rate ended marginally higher on the day at 2.02 percent in advance of next week's $13 billion of 10-year TIPS supply.
The five-year breakeven rate meanwhile held to most of its initial gains at 1.93 percent, which was near its highest level since April. "The breakeven levels are pricing in a greater expectation of increased inflationary pressure. They have had a nice run since the middle of December and will need to see a continuation of inflationary pressures to sustain current levels," said Sean Simko, senior portfolio manager at SEI in Oaks, Pennsylvania.
The rise in TIPS breakeven rates has been stoked by surging energy prices due to tightening supply. U.S. crude futures settled up 0.8 percent at $64.30 a barrel, not far below $64.77 set on Thursday, which was the highest level since late 2014. Longer-dated TIPS breakeven rates faded partly on some investors making room for the 10-year TIPS auction next Thursday, analysts said. Some investors have been pouring money into TIPS-focused funds in anticipation of rising inflation.
In the week ended Jan. 10, TIPS mutual funds and exchanged-traded funds saw $855.75 million in inflows, nearly double the amount in the prior week. It was also the strongest weekly inflows since the $1.043 billion the Nov. 9 week, according to Lipper, a Thomson Reuters unit.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ U.S. TIPS Inflation Breakeven Rates U.S. 5-year, 5-year forward breakeven inflation rate interactive U.S. inflation interactive ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>(Reporting by Richard Leong Editing by Chizu Nomiyama)
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