TSP Performance So Far in 2023: Will G Fund Become the New TSP Favorite?

TSP returns are up so far in 2023 while stock prices and TSP performance in August were down. Will investors make the G Fund their new favorite fund?

September is often the weakest month for stock market and TSP performance. As we start September, a stock market rally in late August lost momentum on the last day of the month. The S&P 500 index (on which the TSP’s C Fund is based) ended last month’s five-month winning streak. The C Fund was down 1.58% for the month.

All of the TSP Funds were down in August—except the G Fund, which was up 0.35%. The G Fund is up 2.62% so far in 2023. For the past 12 months, this TSP Fund is up 3.95%.

Compare these returns for the G Fund to one year ago (August 2022). Last year at this time, the G Fund was also up, but it was up 2.17% for the past 12 months. The rate of inflation was higher in August 2022 than in 2023.

Why Are G Fund Returns Going Up?

Before the COVID-19 experience, Americans adjusted to low interest rates. The amount of debt soared. Borrowed money was used for new cars, the federal government borrowed to pay for crisis-fighting stimulus payments, and companies used debt for leveraged buyouts.

The low-interest era started after the global financial crisis that ended in 2009. The investing environment is different in 2023. Long-term bond yields are now at 15-year highs. The Federal Reserve’s interest rate averaged 0.5% from 2009 through 2021. That is now in our past. The interest rate now is between 5.25% and 5.5%.

The interest rate on Treasury bills is higher now. As a result, the returns for the G Fund are also higher.

All households are paying the price for higher inflation. While the inflation rate has slowed, prices for all essentials are still much higher than two years ago. In many ways, the cost of borrowing large amounts with low-interest rates has not yet caught up with the borrowers who may have to pay more as old loans expire.

When debt matures, the new interest rate will be much higher. Consumers who pay interest on credit card debt are already feeling the difference. Interest expenses are already up about 1% in the last two years.

In recent years, people who bought houses paid the lowest interest rate in a generation. They will have to stay in the same house to keep that low interest rate. Interest rates on a mortgage are much higher now.

G Fund Rate of Return

Those who have been investing money in the G Fund are now enjoying a higher return as the cost of borrowing money goes up. Money invested in the G Fund over the last ten years has not yielded a great return. Now, that pile of money is earning a higher return.

Many retirees have been investing in the stock market. Interest rates were meager. With higher interest rates, older Americans are likely to put more money into bond funds, certificates of deposit, or in the G Fund—relatively safe investments. This is an important consideration for retirees concerned about losing investment assets when the stock market tanks.

While the rate of return on the G Fund is going up, be realistic and don’t confuse the G Fund rate with a cost of living adjustment (COLA) or other adjustments related to a consumer price index. The G Fund interest rate is adjusted each month. It is not designed to match the rate of inflation. The most significant risk of the G Fund is that an investor will lose purchasing power over time as the rate may not keep up with inflation.

The G Fund is thought of as being the safest investment. It does not rise and fall like the stock market does, so it provides stability in an investment portfolio. Of course, the reality is that over longer periods, stock prices have historically provided a higher rate of return—but the higher overall return included times when stock prices dropped significantly.

Keep this in mind: For all of 2022, the G Fund had a rate of return of 2.98%. Compare that to the COLA payment that started showing up based on inflation in 2022. The COLA increase was 8.7%.

The G Fund is invested in short-term U.S. Treasury Securities. The Treasury Department issues these investments for the TSP.  The Treasury Department calculates the G Fund interest rate as the weighted average yield of approximately 183 U.S. Treasury securities on the last day of the previous month.

Federal retirees got a big bump in their COLA payments based on inflation. The G Fund yield is up but was considerably less than the 8.7% increase in Social Security and federal employee retirement payments.

The TSP Fund with the highest percentage of TSP investors’ money varies, usually related to how the stock market has been performing. The C Fund is the most popular when the stock market has been going up. When the market drops for a few months, TSP investors start putting more money into the G Fund or the C Fund depending on the direction of the market.

The movement is not dramatic but the allocation percentage changes over time. Most TSP investors do not transfer money monthly in anticipation of market changes, but some will transfer money while others will gradually change their investment allocations after reading about market conditions changing. The result is the G Fund is the most popular fund for a while and then the C Fund moves into the favored position for a time.

Best TSP Performance in 2023

While September is often the month with the lowest stock market returns, August 2023 was not good for TSP stock returns either. All of the TSP stock funds were down in August.

For the month, all of the TSP Funds declined except the G Fund. The biggest losses were in the S Fund, down 4.06%.

Over 12 months, the returns are much better. The I Fund has the highest return over 12 months, at 18.78%. The C Fund came in second with a 15.91% return. Even the L Income fund, a relatively safe investment with some stocks in its portfolio, came in at 6.86%.

So far in 2023, the C Fund is still up 18.71%, the S Fund is up 14.45%, and the I Fund is up 10.83%.

TSP Performance for August 2023, 12 Months and Year-to-Date

G Fund0.35%2.62%3.95%
F Fund-0.63%1.53%-1.17%
C Fund-1.58%18.71%15.91%
S Fund-4.06%14.45%8.39%
I Fund-3.90%10.83%18.78%
L Income-0.46%5.70%6.86%
L 2025-0.81%7.40%8.33%
L 2030-1.55%10.25%11.14%
L 2035-1.74%10.99%11.77%
L 2040-1.92%11.73%12.42%
L 2045-2.09%12.36%12.95%
L 2050-2.24%13.00%13.52%
L 2055-2.71%15.31%15.87%
L 2060-2.71%15.31%15.87%
L 2065-2.71%15.31%15.87%

Source: TSPDataCenter.com

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47