Trump's BLS shake-up rattles $2.1 trillion inflation-protected bond market
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President Trump's firing of the Bureau of Labor Statistics chief is raising alarms beyond data reliability and monetary policy, JPMorgan warns. It could also upset the $2.1 trillion Treasury Inflation-Protected Securities (TIPS) market.
Why it matters: TIPS are government securities that adjust payouts based on the official inflation rate. If the validity of those numbers weakens, the market could lose an important hedge against inflation.
What they're saying: "Potential politicization of the Fed has been much discussed over the past several months, but the risk of politicizing the data collection process should not be overlooked," Michael Feroli, chief U.S. economist at JPMorgan, wrote in a note.
- The TIPS market is built on a foundation of trust in the validity of the inflation data reported by the BLS through the Consumer Price index each month, Feroli noted.
- The inflation data's integrity is "at least" as important as that of the labor market data given how much traders rely on it – both within and outside of the TIPS market.
Catch up quick: Trump fired Erika McEntarfer, the head of the BLS, after the agency's monthly data print showed signs of cracks in the labor market.
- Trump nominated Heritage Foundation economist E.J. Antoni to replace her.
- Antoni has suggested the possibility of suspending the bureau's flagship monthly jobs report.
- When White House Press Secretary Karoline Leavitt was asked about continuing to publish the report, she said "I believe that is the plan," but added that Antoni "floated the idea of possibly suspending until they can get the data and the methodology in order."
Zoom in: Here's a brief primer on how TIPS work.
- TIPS are tied to inflation, so the principal goes up or down based on the direction of prices as measured by CPI.
- Upon maturity, investors receive either the original principal amount, or the inflation-adjusted principal, whichever is greater.
- That makes TIPS a highly valued inflation hedge in a market without a lot of other low-risk, inflation hedging instruments.
Be smart: "Every government has an incentive to misstate or to… say that inflation is not as bad as it is," said Brij Khurana, fixed-income portfolio manager at Wellington Management.
- Investors are hoping the over $2 trillion TIPS market is big enough to keep the administration from shaking up inflation data too much.
