$2 Trillion Bond Market in Jeopardy, US CPI Delay Risk Comparable to US Debt Ceiling Crisis

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The ongoing U.S. government shutdown is pushing the $2 trillion Treasury Inflation-Protected Securities (TIPS) market into unprecedented territory.

On October 24, WallstreetCN reported that the White House stated that due to the government shutdown, the U.S. government may not be able to release October's inflation data. This will directly affect the TIPS and inflation swap markets.

Because TIPS are adjusted based on the CPI and their interest payments are linked to this index, the absence of data means the market will lose its pricing “anchor.”

Data shows that some ETFs investing in TIPS have recently experienced capital outflows, and the performance of TIPS has lagged behind ordinary U.S. Treasuries.

Jonathan Hill, Head of U.S. Inflation Strategy at Barclays Capital, described the current situation facing the TIPS market as comparable to the “debt ceiling crisis”, and said it is an event that all market participants must closely monitor.

If the October CPI data is ultimately missing, the market will, for the first time, activate “contingency measures” set up for TIPS and inflation swaps. Volatility caused by data quality concerns may also follow.

First Test for the “Contingency Measures”

The operating mechanism of the TIPS market makes it directly dependent on CPI data.

These securities have a lower coupon than regular Treasuries, but their principal is adjusted according to CPI, providing investors with inflation protection.

There is a two-month lag between the CPI figure and TIPS interest payment. Therefore, although the government shutdown that began October 1 delayed the release of September’s CPI data from its planned date of October 15 to last Friday, it has not yet triggered the use of the established “contingency measures.”

However, Barclays' Jonathan Hill points out that things would radically change if the October data cannot be released. Hill said:

If the October CPI data is still not released by the end of November, the contingency measures will take effect.

According to the U.S. Code of Federal Regulations, when CPI data for a given month (M) is missing, the Treasury will use an estimated value. This estimate is based on the change in CPI over the most recent 12 months. This estimated index will be used to calculate principal adjustments and interest payments for TIPS for that period.

Crucially, once this alternative measure is activated, its computed result is final—even if the Bureau of Labor Statistics (BLS) later releases actual CPI data, the estimate will not be retroactively revised. This mechanism is designed to ensure uninterrupted TIPS payments during extraordinary periods like government shutdowns.

He emphasized that this would affect not only TIPS, but also the inflation swap market. Hill sighed:

This is something that has never happened before.

Data Quality Concerns Have Already Hit Investor Demand

Even if the data is eventually released, concerns about its quality could trigger market volatility.

The White House acknowledged in a statement last Friday that the lack of government funding is impeding price surveyors from doing their work.

A Morgan Stanley strategy team led by Aryaman Singh and Matthew Hornbach believes that concerns over data quality explain the recent weak performance of the TIPS market. In their report, they wrote:

As the quality of CPI data deteriorates, investors believe they cannot effectively hedge against real inflation, leading to decreased demand for TIPS.

The report also offered another perspective:

Given poor data quality, TIPS require a higher term premium compared to regular Treasuries.

This is directly reflected in market performance—since mid-July, TIPS have consistently underperformed nominal Treasuries.

The Market Has Not Yet Panicked

Despite the uncertain outlook, the market remains relatively restrained for now.

Some analysts believe TIPS’ underperformance has broader causes. For example, falling oil prices have pushed retail gasoline prices to their lowest level since last December, and gasoline accounts for about 3% of the CPI, which in itself dampens demand for inflation protection in the market.

Furthermore, recent outflows from TIPS-related ETFs have not yet had a material impact on the size of these large funds. Investors who rely on these products for liquidity are unlikely to stage a mass exodus in the short term.

Barclays' Hill also said unless the data interruption problem “becomes systematic,” it does not yet pose a major threat to the market.

Gang Hu, a TIPS market expert and managing partner at Winshore Capital Partners, commented:

As long as the price data is not manipulated for political purposes, I don’t think this will change the big picture.

But he also warned:

If things deteriorate to that point, we might need to address bigger problems before asking whether people will still buy TIPS.

Risk Warning and DisclaimerThe market has risks, and investment should be done cautiously. This article does not constitute personal investment advice and does not take into account the special investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article fit their particular circumstances. Investing accordingly is at your own risk. ```