Data risk

Buying inflation protected securities seems like a wonderful idea. Simply buy the bond, and sit back as its return mirrors the increase in CPI (or some other adjusted benchmark of inflation).

The problem is, of course, the incentives to change the rules of the game once it become apparent they disadvantage one of the parties. Argentina is but the latest example of the false belief that probity and mendacity stay constant no matter the external circumstances.

March 13 (Bloomberg) -- Argentina’s manipulation of
consumer-price data is turning government bonds whose interest
payments rise and fall with inflation into securities resembling
fixed-rate debt.
The statistics agency reported today that annual inflation
was 9.7 percent in February, marking the 12th-straight month
that the rate held between 9.5 percent and 9.9 percent. The 0.4
percentage-point range over the past year, which is down from an
average annual variation of 2.7 points from 2004 through 2010,
is smaller than the ranges of 1.5 points in neighboring Brazil
and 1.8 points in the U.S.
With the government reporting inflation near 10 percent,
the 12.4 percent yield on the benchmark bonds linked to consumer
prices gives the securities a rate of return of about 22
percent. The International Monetary Fund says Argentina is
underreporting the data and economists including ex-central
bankers Alfonso Prat-Gay and Martin Redrado say consumer prices
are soaring more than 20 percent a year.
“Forget making any bet on what’s going to happen with
inflation because we know it’s distorted,” Boris Segura , a
strategist at Nomura Securities International, said in a phone
interview from London. “This is basically a fixed-rate bond.”