Published October 18, 2013
NEW YORK – While the federal government ramped its operations back up on Thursday, 16 days of a partial shutdown have left some lingering headaches in certain corners of the bond market that rely on timely inflation data to value securities.
The small army of data collectors from the Bureau of Labor Statistics and the Census Bureau who gather pricing information each month on everything from animal crackers to automobiles were among the federal workers furloughed during the shutdown.
That has left a sizeable gap in the figures used to compile the Consumer Price Index, the broadest measure of U.S. inflation. Release of September's CPI reading, originally scheduled for October 16, was postponed and has been rescheduled to October 30.
Economists at the Federal Reserve Bank of Cleveland warned this week that the data-gathering hiatus could have an impact on the accuracy of the CPI until next May. The index is computed from 83,300 separate price quotes.
For fixed income securities traders and fund managers, the problem is that monthly CPI increases or decreases are essential to valuing a class of bonds designed to offer protection against inflation, which is a bondholder's greatest enemy. Principal and interest payments for these bonds, Treasury Inflation-Protected Securities, or TIPS, adjust to changes in CPI.
Imprecise CPI readings, analysts say, could further nick the appeal of TIPS, which are already under pressure on bets that wage and price growth will likely stay subdued due to the economic drag from the shutdown.
The appetite for the securities will face its first test next week when the Treasury will sell $7 billion more of an existing $16 billion series of 30-year TIPS, six days before the postponed release of the September CPI figures.
That means the TIPS Index Ratio used to help calculate the bond's principal will be two months old at the time of next week's auction. Typically, the CPI report is released prior to a TIPS auction.
While the delay is expected to have a relatively limited impact, "we are seeing more of a concession than usual," said Michael Pond, co-head of interest rate strategy at Barclays Capital in New York, meaning that investors are positioning for a somewhat lower price for the new amount being sold than for the amount currently outstanding.
On Friday, the yield on the 30-year TIPS issue that will be reopened next Thursday was about 1.375 percent. Traders expect the added amount to this TIPS issue to fetch a slightly higher yield at 1.379 percent. A higher yield means a lower price since bond prices and yields move in opposite directions.
TIPS breakevens, or the differences between the yields on TIPS and regular Treasuries, shrank this week as investors snapped up regular Treasuries more than TIPS after the government reached an 11th hour agreement to avert a default by extending the government's $16.7 trillion borrowing authority.
The 30-year TIPS breakeven was 2.230 percentage points, compared with 2.345 points a week earlier.
The timing of the CPI delay comes when there are growing expectations the economic drag due to the first federal shutdown in 17 years will force the Federal Reserve to stick with its $85 billion monthly bond-purchase stimulus into 2014.
The Fed's program has helped push asset prices up but has not fanned wider price pressures in the economy. The absence of inflationary pressures could damp TIPS demand as well.
Graphic: U.S. inflation http://link.reuters.com/guq93t
Graphic: U.S. consumer prices http://link.reuters.com/duq93t
In August, the reference month for Thursday's auction, the CPI edged up just 0.1 percent, bringing its year-over-year increase to a modest 1.5 percent, which is below the 2 percent level for inflation targeted by the Fed.
Economists polled by Reuters expected the September CPI likely rose by 0.2 percent from a month earlier and by 1.2 percent from the previous year.
Although a last-minute deal in Congress averted a default and reopened the government on Thursday, another Washington episode of gridlock could unfold in early 2014, possibly causing another disruption to the economy, not to mention the government's collection of economic data.
"The real story here is the real economy, not the data collection. We expect (TIPS) breakevens to rise but if there continues to be a headwind due to the situation in Washington, that will keep inflation expectations low," Barclays' Pond said.
(Reporting by Richard Leong; Editing by Dan Grebler)