Jari Ulmer's  Instablog

The Data

Federal Employee demographics are published by the Office of Personnel Management with latest dataset coming from September of 2012. Government Executive is currently updating a list of all federal agencies who have publicly addressed the need for furloughs. A few agencies have issued official furlough letters with set terms, while some simply guess they may "need to furlough [insert vague large sounding number] for [insert indeterminate number of days]".

In order to break down our analysis into something finer than $85 billion we'll need to find which of the 100+ agencies are forced to make cuts.

For this analysis we'll focus only on the agencies that are considering a furlough. Where those agencies haven't specified a length of their furlough we'll assume the average, which is 17.4 days. If an agency doesn't give an exact number of potentially affected employees we'll assume the worst case: the entire agency.

Using the above assumptions I've derived an agency adjusted furlough scenario that affects 693,926 employees at the cost (savings) of $49.9 billion over the next year. Note the following is thus a conservative estimate as these numbers are higher than the $46 billion on the books for 2013.

Treasury Inflation Protected securities, or TIPs, are a unique offering of the U.S. Government. They're bonds that pay interest equal to the current monetary inflation rate as determined by the Consumer Price Index. The theory is TIPs help protect your money by keeping pace with inflation. It used to be TIPs would pay two rates, a base coupon and the CPI as it was adjusted every 6 months. Currently the base coupon is dismal, thus TIPs basically yield only the CPI.

Theoretically we should be able to match the TIPs inflation rate with the CPI, knowingly a little bit skewed since the CPI is updated monthly and TIPs every 6 months. Since buying TIPs from TreasuryDirect.gov is impossible (see my article on bonds), we can look at iShares Barclays TIPs Bond Fund (TIP). Since TIP's price movement is tied to supply/demand/and the treasury curve we must look at its dividend yield:

(click to enlarge)

If we correlate this data:(click to enlarge)

It appears the correlation between TIP's yield and inflation breaks down in the long run, likely there are more variables that affect TIP's yield than just the CPI. However we should note the TTM correlation appears cyclical. Since correlation is currently high it might be a safe bet to assume TIP's dividend will pull away from the published CPI.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.