Counting on the G Fund

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By on April 6, 2020 in Pay & Benefits with 0 Comments
Balance scale in a level (flat) position with a box labeled 'return' on one side and a box labeled 'risk' on the other side

In times of market turmoil, investors tend to move towards so-called “safe havens” – assets that are more likely to retain their value during market downturns – and the Thrift Savings Plan’s G Fund certainly fits that category of investment. 

The G Fund is a financial asset uniquely available to TSP participants. Unlike TSP’s C, F, S, and I Funds, the G Fund is not duplicated by funds available through private asset management companies offering bond and stock funds. 

Carrying many of the aspects of a money market fund, the fund pays a rate equal to longer-term government securities. That explains its popularity. Even before the recent market turmoil, 45% of TSP assets were in the G Fund. 

“The G Fund invests exclusively in a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP. The earnings consist entirely of interest income on the security.”

“The payment of G Fund principal and interest is guaranteed by the U.S. Government. This means that the U.S. Government will always make the required payments. In other words, your G Fund investment is not subject to credit (default) risk. (The risk that a borrower will not make a scheduled payment of principal and/or interest.)”

TSP Website

How is interest calculated?

G Fund interest represents the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. Although the G Fund reports a Daily Share Price, the interest rate is calculated monthly, based on the last day of the previous month. 

While the interest rate is calculated monthly, TSP does publish a Daily Share Price.

The Daily Share Price is calculated as:

Daily Share price = net asset value (NAV) DIVIDED BY shares outstanding.  

Each day’s net asset value (NAV) = yesterday’s NAV PLUS income (i.e., interest) MINUS expenses.

Changes in interest rates

Unfortunately, market turmoil has led to falling interest rates and lower returns for the G Fund. 

When the G Fund was introduced back in the 1980s, no one imagined that interest rates would be falling to their present levels. As an example of how interest rates have fallen in general, one only has to look at the yield on 10-year Treasuries.

Line graph showing the 10-year treasury yields from 7/2015 to 1/2020
10-Year Treasury Constant Maturity Rate

In March, the Federal Reserve lowered its Federal Funds rate target range to 0.00-0.25 resulting in 1-month, 2-month, and 3-month interest rates falling to zero on March 25, although they have all moved up slightly since that time.

As a result of falling interest rates, while the G Fund has avoided losses, its rate of return has fallen. The fund returned 0.11% in March 2020 as compared to its 0.21% return in April 2019.

Of course, to put that in context, in April 2019, the C Fund (the second-most popular of the TSP funds) returned 4.05%. In March 2020, the C Fund returned -12.40%.

Back in 2016, I asked the question What Would Happen to the TSP if Interest Rates Turned Negative?

Happily, in the United States we haven’t had to deal with that question, but in Germany it is a real issue as all their government bonds are effectively yielding negative rates with the exception of their 30-year bond, which currently carries an effective interest rate of 0.010%.

I contacted the Federal Thrift Retirement Investment Board, which oversees the TSP, and asked for their plans if all interest rates turned negative. Their Director of External Affairs would not speculate on any possible action if the weighted average yield of Treasury bonds resulted in a negative interest rate.

Role of inflation

When we speak of the G Fund’s interest rate, we talk in nominal terms, that is the rate before accounting for inflation.

“The G Fund assets are managed internally by the Federal Retirement Thrift Investment Board. The G Fund buys a nonmarketable U.S. Treasury security that is guaranteed by the U.S. Government. This means that the G Fund will not lose money.”

That may be technically correct, but TSP does not guarantee that the G Fund will keep up with inflation. On an inflation-adjusted basis, the G Fund is already at a negative yield.

Currently, the Consumer Price Index for All Urban Consumers is running at 2.3%. Over the past 12 months, the G Fund rate of return is 1.97%. Even the 30-year Treasury bond, with a current yield of 1.35% as of March 31th, is falling behind the inflation curve.

Unless the current economic downturn also slows the rate of inflation, even G Fund participants will suffer some inflation-adjusted loss this year.

What should TSP participants do?

None of this discussion answers what is probably the most pressing question for TSP participants – Should I be in the G Fund?

This article is not meant to provide investment advice. As the current economic situation easily demonstrates, no one has a crystal ball on the future, even though many speak as though they have special insights.

As Brad Bobb wrote, market drawdowns can be very nerve wracking. Moving money into or out of the G Fund involves your understanding of yourself, your investment plans, and how you handle matters of risk and uncertainty. (See Is Now the Time to Move to the G Fund?)

© 2020 Michael Wald. All rights reserved. This article may not be reproduced without express written consent from Michael Wald.


About the Author

Michael Wald is a public affairs consultant and writer based in the Atlanta area. He specializes in topics related to government and labor issues. Prior to his retirement from the U.S. Department of Labor, he served as the agency’s Southeast Regional Director of Public Affairs and Southeast Regional Economist.