U.S. TIPS breakeven rates rebound with oil prices

(Updates market action, adds background)

NEW YORK, Dec 16 (Reuters) - The U.S. bond market's gauge of inflation expectations rose on Tuesday in volatile trading as U.S. oil futures rebounded from 5-1/2-year lows struck earlier on fears about weakening global energy demand and oversupply.

The 45 percent drop in oil prices from their June peak raised bets that tumbling energy costs would put a broad lid on domestic inflation and could lower the government's Consumer Price Index in the coming months.

The value of a TIPS issue is referenced against the CPI (Other OTC: CPICQ - news) .

The U.S. Labor Department is scheduled to released its November CPI reading at 8:30 a.m. EST (1330 GMT) on Wednesday. Economists polled by Reuters forecast the CPI, the government's broadest inflation gauge, likely dipped 0.1 percent last month, lowering its year-over-year rise to 1.4 percent.

In anticipation of the CPI falling, investors have been shedding TIPS holdings in recent weeks.

On Tuesday, some appetite for TIPS emerged as U.S. oil futures stabilized near $56 a barrel, traders said.

The yield spread between five-year Treasury Inflation-Protected Securities and regular five-year Treasuries, or the five-year TIPS breakeven inflation rate, widened more than 1 basis point to 1.14 percent.

Earlier Tuesday, the five-year TIPS inflation breakeven rate decreased to 1.08 percentage points, the lowest since September 2010, according to Reuters data.

On the New York Mercantile Exchange, January crude futures were last down 16 cents at $55.75 a barrel after trading as low as $53.60 earlier Tuesday. (Reporting by Richard Leong; Editing by James Dalgleish)