The ongoing government shutdown in the U.S. is pushing the $2 trillion Treasury Inflation-Protected Securities (TIPS) market into unprecedented territory. On October 24, it was reported that the White House indicated that due to the government closure, the U.S. government might not release the inflation data for October. This directly impacts both TIPS and the inflation swap markets.

As TIPS are adjusted based on the Consumer Price Index (CPI), and their interest payments are also linked to this index, the absence of data means the market loses its pricing "anchor." Data shows that some exchange-traded funds (ETFs) investing in TIPS have recently seen outflows, with TIPS underperforming regular U.S. Treasuries.

Jonathan Hill, Barclays Capital's head of U.S. inflation strategy, described the current situation in the TIPS market as comparable to the "debt ceiling crisis," highlighting it as a matter that all market participants need to closely monitor. If the October CPI data is ultimately absent, it will be the first time the "backup plan" for TIPS and inflation swaps has to be deployed; the turbulence caused by the quality of the data itself may also emerge.

**First Testing of the 「Backup Plan」**

The operational mechanism of the TIPS market makes its reliance on CPI data extremely direct. These securities have a lower coupon rate compared to regular government bonds, but their principal adjusts with CPI fluctuations, providing investors with inflation protection. The CPI figures dictate the interest payments on TIPS with a two-month lag. Therefore, while the government shutdown, which started on October 1, has delayed the release of the September CPI data from the scheduled October 15 to last Friday, it has not yet triggered the extreme circumstances that would necessitate using the established "backup plan."

However, Barclays' Jonathan Hill pointed out that if the October data cannot be released, the situation will completely change. Hill stated: "If the October CPI data remains unpublished by the end of November, the backup plan will come into effect." According to the U.S. Federal Regulations Code, when the CPI data for a given month (M) is missing, the Treasury will use an estimated value. This estimate is based on the changes in CPI over the previous 12 months. This calculated index will be used for adjusting the principal and interest payments for the current TIPS.

Importantly, once this alternative plan is activated, its calculated outcome will be final, meaning that even if the Bureau of Labor Statistics (BLS) later releases the actual CPI data, this estimate will not be retrospectively revised. This mechanism aims to ensure continuous payments for TIPS, especially during extraordinary circumstances such as a government shutdown. He emphasized that this will not only affect TIPS but will also reverberate through the inflation swap market. Hill lamented: "This situation has never occurred before."

**Concerns About Data Quality Impacting Investor Demand**

Even if the data is ultimately released, quality issues may lead to market volatility. In a statement last Friday, the White House acknowledged that the funding cuts are hindering price surveyors' work. A team of Morgan Stanley strategists led by Aryaman Singh and Matthew Hornbach believes that the concerns about data quality can explain the recent poor performance of the TIPS market. They wrote in their report: "As the quality of CPI data deteriorates, investors perceive that they cannot effectively hedge against real inflation, leading to decreased demand for TIPS."

The report also presented another perspective: "Due to poor data quality, TIPS require a higher term premium compared to regular Treasuries." This is directly reflected in market performance, with TIPS underperforming nominal Treasuries since mid-July.

**Markets Have Not Yet Spiraled Into Panic**

Despite the uncertainty surrounding the outlook, the market remains relatively restrained for now. Some analysts believe that the weak performance of TIPS is set against a broader backdrop. For instance, falling oil prices have led retail gasoline prices to drop to the lowest level since last December, with gasoline accounting for about 3% of CPI, which itself dampens demand for inflation protection.

Additionally, the recent outflow of funds from inflation-related ETFs has not yet posed a substantial impact on the size of these large funds. Investors relying on these products for liquidity may not necessarily flee en masse in the short term. Barclays' Hill also stated that unless the data interruption issue "becomes systematic," it does not pose a significant threat to the market. Inflation market expert and Winshore Capital Partners managing partner Gang Hu said: "As long as price data can remain free from manipulation for political purposes, I don't think the overall situation will change." However, he warned: "If it deteriorates to that level, we may have to address some larger issues before considering whether people still purchase TIPS."