A Government Shutdown could be a Disaster... and it's Likely

Kalshi aims to provide investors with tools to manage risks in the case of extreme events.

Many of our users have reached out worried about the implications of a government shutdown, which may begin on October 1st. We've released a number of markets to address these risks.

Alongside our Will Government Shutdown Occur and Government Shutdown Duration markets, we've added a specific market for delay in CPI data, as this data is implicated in a number of derivative contracts. We will also be releasing additional markets this week, including a delay in NFP,  to hedge various government shutdown risks more directly.

As of Monday morning, Kalshi market participants forecast the probability of a shutdown at 78%, and rising.

A shutdown duration of over 7 days is estimated at 62%.

Aside from the general economic impacts of a shutdown, there are very specific cases where key economic data may be delayed, and various market contracts based on these data could be disrupted.

A Bureau of Labor Statistics (BLS) spokesperson has already announced that in the event of a shutdown, the agency will “suspend data collection, processing and dissemination. Once funding is restored, BLS will resume normal operations.” If that happens, these are the economic data that will be the first affected, and their linked events:

The Federal Reserve is famously “data dependent” and these inputs are all critical to their thinking. However, as there is no market-moving Fed decision pending in October, the delay in data publication may not have market-moving consequences in relation to the Fed.

However, individuals who hold inflation-linked securities and swaps may be directly affected.

If the data is delayed to the next month (e.g. data for September is delayed release until November), then inflation swaps pay out based on the previous month’s (August’s) data. This would alter the transfer expected between the swap counterparties, and result in a weaker expected return for potential hedgers, speculators, and market makers.

As of the early 2020s, the volume of inflation-linked securities and swaps can reach hundreds of billions of dollars. Outstanding Treasury Inflation Protected Securities similarly trade ~$400 billion monthly.

An institutional client of Kalshi notes “I have millions of dollars of inflation swaps at risk if the government does not release this data.”

Later data releases which may be affected by a continuing shutdown include:

For a general guide on the history of shutdowns and their implications, try this from the Committee for a Responsible Federal Budget.

Since the introduction of the modern budget process in 1976 there have been 20 “funding gaps” but only four true shutdowns lasting more than one day. The most recent of these (Dec 2018-Jan 2019) was the longest lasting at 35 days, but because several appropriations had been previously enacted, the shutdown was only partial. None of them is remembered for a particular severe impact.

Since that most recent shutdown, however, financial contracts that trade based on regular US data releases have spiked (see above), so the impacts could be quite different.

We encourage you to reach out to [email protected] if you have a specific risks you’d like to hedge related to a government shutdown.