Core Insights - Traders are facing unprecedented challenges in pricing inflation-linked securities due to the unavailability of Consumer Price Index (CPI) data amid the U.S. government shutdown, which may extend the data void [1] - The shutdown has prompted investors to activate "backup mechanisms" embedded in legal documents of inflation-linked bonds and derivatives, which have not been practically tested [1][2] - The differences in backup mechanisms for various inflation-linked securities, such as TIPS and inflation swaps, have led to significant market distortions [1][2] Group 1: Market Dynamics - The U.S. inflation-protected securities market, valued at $2 trillion, uses a different calculation method compared to the $5 trillion inflation swap market, leading to discrepancies in performance [1] - A TIPS maturing in January 2025 has shown stronger performance due to market expectations of higher returns, exacerbated by the ongoing government shutdown [1][4] - The longer the government shutdown persists, the more severe the distortions in the market for hedging inflation and measuring inflation expectations will become [1] Group 2: Backup Mechanisms - The backup calculation method for TIPS is defined by the U.S. Treasury, which will use the latest available 12 months of CPI changes to publish a synthetic value if October CPI data is missing [2] - For zero-coupon inflation swaps, the International Swaps and Derivatives Association (ISDA) specifies that the backup calculation will rely on October 2024 CPI data, compounded with the year-over-year increase until September 2025 [2] - The activation of backup mechanisms will have a unique impact on the interest and principal payments of TIPS due in January 2025, as these are calculated based on CPI values from October and November [2] Group 3: Performance Metrics - Calculations indicate that if both October and November CPI data are missing, the annualized breakeven rate for the January 2025 TIPS will reach 3.15%, while the same rate for inflation swaps will only be 1.76% [3] - There is a significant gap between the breakeven rates of TIPS and inflation swaps, highlighting the potential for relative value opportunities in the inflation market [4] - If the government shutdown extends for several more weeks, the strengthening trend of the January 2025 TIPS may continue [4]