US government shutdown may prompt first-ever workaround for inflation-protected bonds

NEW YORK, Oct 29 (Reuters) – With the U.S. government shutdown threatening to freeze October’s inflation report, the Treasury is expected to deploy a workaround to compute the index underpinning the $2.1 trillion market for inflation-protected bonds for the first time since their 1997 launch, a move that may cause pricing quirks as traders adjust their calculations.
The Bureau of Labor Statistics has said it has halted all data collection and publishing during the shutdown, apart from recalling staff to deliver September’s Consumer Price Index, released last Friday. With the standoff now the second-longest on record, the White House warned there will likely be no inflation data published next month, which means the BLS’ October CPI report scheduled for November 13 won’t be released.
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That could be a headache for Treasury Inflation-Protected Securities (TIPS) market participants, as the value of those bonds, which investors use to protect their capital from inflation, hinges directly on the index. TIPS pay a fixed interest rate, but the interest is calculated on a principal amount that rises with inflation and falls in periods of deflation. How much the principal rises or falls is determined by the CPI index.
TIPS yields, also known as