G Fund in the current environment

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MandyLuna
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G Fund in the current environment

Post by MandyLuna »

Please excuse my lack of knowledge regarding the G Fund. I hold some of it in my TSP and always understood it to track longer term bond rates - while at the same time being a guaranteed return, even if low.

All that said, in an environment of raising interest rates, we can expect the G Fund to have increasing returns in the near and farther term as long as interest rates are rising? I hold some short term bond funds, so I see some increases there.
jebmke
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Re: G Fund in the current environment

Post by jebmke »

My understanding is that the G fund is a stable value fund. I’d expect rates to lag the market rates in both directions.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: G Fund in the current environment

Post by gclancer »

MandyLuna wrote: Thu Sep 15, 2022 6:17 am All that said, in an environment of raising interest rates, we can expect the G Fund to have increasing returns in the near and farther term as long as interest rates are rising? I hold some short term bond funds, so I see some increases there.
Yes, G Fund is an ideal fixed income holding in a rising rate environment. Reason being, the interest rate is set using the weighted average of intermediate and longer term treasuries, but it has a 1 day maturity (like a money market fund). Therefore as rates rise, the interest rate paid by the G Fund will rise, but there will be no drop in value like there would be with a bond fund.
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Re: G Fund in the current environment

Post by Parkinglotracer »

gclancer wrote: Thu Sep 15, 2022 6:39 am
MandyLuna wrote: Thu Sep 15, 2022 6:17 am All that said, in an environment of raising interest rates, we can expect the G Fund to have increasing returns in the near and farther term as long as interest rates are rising? I hold some short term bond funds, so I see some increases there.
Yes, G Fund is an ideal fixed income holding in a rising rate environment. Reason being, the interest rate is set using the weighted average of intermediate and longer term treasuries, but it has a 1 day maturity (like a money market fund). Therefore as rates rise, the interest rate paid by the G Fund will rise, but there will be no drop in value like there would be with a bond fund.
G fund is Yielding north of 3% last time I looked … reason to keep money in tsp for sure I’d say.
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SquawkIdent
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Re: G Fund in the current environment

Post by SquawkIdent »

Parkinglotracer wrote: Thu Sep 15, 2022 6:47 am
gclancer wrote: Thu Sep 15, 2022 6:39 am
MandyLuna wrote: Thu Sep 15, 2022 6:17 am All that said, in an environment of raising interest rates, we can expect the G Fund to have increasing returns in the near and farther term as long as interest rates are rising? I hold some short term bond funds, so I see some increases there.
Yes, G Fund is an ideal fixed income holding in a rising rate environment. Reason being, the interest rate is set using the weighted average of intermediate and longer term treasuries, but it has a 1 day maturity (like a money market fund). Therefore as rates rise, the interest rate paid by the G Fund will rise, but there will be no drop in value like there would be with a bond fund.
G fund is Yielding north of 3% last time I looked … reason to keep money in tsp for sure I’d say.
3.375% for September

https://www.tspfolio.com/tspgfundinterestrate
Parkinglotracer
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Re: G Fund in the current environment

Post by Parkinglotracer »

SquawkIdent wrote: Thu Sep 15, 2022 6:59 am
Parkinglotracer wrote: Thu Sep 15, 2022 6:47 am
gclancer wrote: Thu Sep 15, 2022 6:39 am
MandyLuna wrote: Thu Sep 15, 2022 6:17 am All that said, in an environment of raising interest rates, we can expect the G Fund to have increasing returns in the near and farther term as long as interest rates are rising? I hold some short term bond funds, so I see some increases there.
Yes, G Fund is an ideal fixed income holding in a rising rate environment. Reason being, the interest rate is set using the weighted average of intermediate and longer term treasuries, but it has a 1 day maturity (like a money market fund). Therefore as rates rise, the interest rate paid by the G Fund will rise, but there will be no drop in value like there would be with a bond fund.
G fund is Yielding north of 3% last time I looked … reason to keep money in tsp for sure I’d say.
3.375% for September

https://www.tspfolio.com/tspgfundinterestrate
Great call squawkident,

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vineviz
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Re: G Fund in the current environment

Post by vineviz »

MandyLuna wrote: Thu Sep 15, 2022 6:17 am Please excuse my lack of knowledge regarding the G Fund. I hold some of it in my TSP and always understood it to track longer term bond rates - while at the same time being a guaranteed return, even if low.

All that said, in an environment of raising interest rates, we can expect the G Fund to have increasing returns in the near and farther term as long as interest rates are rising? I hold some short term bond funds, so I see some increases there.
There's really no way to reliably predict whether long-term bond yields, and therefore the interest rate on the TSP G Fund, will continue to rise or not.

It functions like a stable value fund, so as long as the rate there is higher than you can get on other deposit accounts (e.g. savings account, money market funds, etc.) it will be a good alternative to those.

But short-term bond funds have another source of return, which is price appreciation. Although the yield on short-term bonds is - depending on which ones you're talking about - probably slightly lower than the yield on TSP G Fund that doesn't mean that short-term bonds can't have a greater total return over some period of time.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
rkhusky
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Re: G Fund in the current environment

Post by rkhusky »

vineviz wrote: Thu Sep 15, 2022 7:36 am But short-term bond funds have another source of return, which is price appreciation.
Which occurs when rates fall.
G Fund doesn't temporarily lose money when rates increase and doesn't temporarily gain money when rates decrease.
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Re: G Fund in the current environment

Post by MrJedi »

The G fund rate is kind of obscurely determined. It's something like the weighted average of the outstanding notes/bonds maturing at least 4 years out. The equivalent maturity floats around but it ends up loosely tracking with the 10 year rate since that sits in the middle of the maturity ranges.

As mentioned, it performs very well with rising rates since you get the increased rate without the loss in principal value. But it will not perform as well with falling rates since there is no principal appreciation in that case. Rates are rising now but we do not know when they will stabilize or even start falling. I would personally treat G fund closer to a cash allocation than a bond allocation.
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MandyLuna
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Re: G Fund in the current environment

Post by MandyLuna »

Outside of the G Fund, I own short term bond funds and ETFs, so I am trying to look at my overall fixed income allocations in this rate environment.

Thank you. While it doesn't show [b outsized[/b] performance from 2021 through 2022, I do note that the returns have been steadily improving for the G Fund over the past year. Thank you for the chart.
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SquawkIdent
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Re: G Fund in the current environment

Post by SquawkIdent »

Parkinglotracer wrote: Thu Sep 15, 2022 7:23 am
SquawkIdent wrote: Thu Sep 15, 2022 6:59 am
Parkinglotracer wrote: Thu Sep 15, 2022 6:47 am
gclancer wrote: Thu Sep 15, 2022 6:39 am
MandyLuna wrote: Thu Sep 15, 2022 6:17 am All that said, in an environment of raising interest rates, we can expect the G Fund to have increasing returns in the near and farther term as long as interest rates are rising? I hold some short term bond funds, so I see some increases there.
Yes, G Fund is an ideal fixed income holding in a rising rate environment. Reason being, the interest rate is set using the weighted average of intermediate and longer term treasuries, but it has a 1 day maturity (like a money market fund). Therefore as rates rise, the interest rate paid by the G Fund will rise, but there will be no drop in value like there would be with a bond fund.
G fund is Yielding north of 3% last time I looked … reason to keep money in tsp for sure I’d say.
3.375% for September

https://www.tspfolio.com/tspgfundinterestrate
Great call squawkident,

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vineviz
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Re: G Fund in the current environment

Post by vineviz »

MandyLuna wrote: Thu Sep 15, 2022 8:15 am Outside of the G Fund, I own short term bond funds and ETFs, so I am trying to look at my overall fixed income allocations in this rate environment.

Thank you. While it doesn't show [b outsized[/b] performance from 2021 through 2022, I do note that the returns have been steadily improving for the G Fund over the past year. Thank you for the chart.
IMHO investors should not pretend that they ever know what kind of "rate environment" they are in or will be in.

Your asset allocation should be based on your circumstances, not on market predictions.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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MandyLuna
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Re: G Fund in the current environment

Post by MandyLuna »

I wouldn't use the word predictions, I would say conditions. My circumstances don't allow me to go blindly.
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vineviz
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Re: G Fund in the current environment

Post by vineviz »

MandyLuna wrote: Thu Sep 15, 2022 9:10 am I wouldn't use the word predictions, I would say conditions. My circumstances don't allow me to go blindly.
The word you use doesn’t matter much. Whatever you call it, a financial plan that depends on successful and reliable market timing is bound to fail.
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AlwaysLearningMore
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Re: G Fund in the current environment

Post by AlwaysLearningMore »

vineviz wrote: Thu Sep 15, 2022 8:53 am
MandyLuna wrote: Thu Sep 15, 2022 8:15 am Outside of the G Fund, I own short term bond funds and ETFs, so I am trying to look at my overall fixed income allocations in this rate environment.

Thank you. While it doesn't show [b outsized[/b] performance from 2021 through 2022, I do note that the returns have been steadily improving for the G Fund over the past year. Thank you for the chart.
IMHO investors should not pretend that they ever know what kind of "rate environment" they are in or will be in.

Your asset allocation should be based on your circumstances, not on market predictions.
In the past you wrote this:
vineviz wrote: Fri Apr 10, 2020 8:05 am Most investors are better off using the F fund almost entirely. As the only actual bond fund available in the TSP, it's the best diversification for your stock allocation.

The G fund is effectively a money market fund (i.e. "cash" or a "stable value" fund). Historically it's offered much higher yields than non-TSP money market funds, but unless you're trying to provide an extreme amount of short-term liquidity (or are absurdly risk-averse) the F fund is the better long-run choice.
(emphasis added)

In your opinion, what constitutes "absurdly risk-averse" and makes the G Fund the better option than the F Fund?
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Re: G Fund in the current environment

Post by vineviz »

AlwaysLearningMore wrote: Thu Sep 15, 2022 9:20 am In your opinion, what constitutes "absurdly risk-averse" and makes the G Fund the better option than the F Fund?
Anyone who is literally losing sleep over the fact that the TSP F fund is down 10% year-to-date would likely be more comfortable with the G Fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: G Fund in the current environment

Post by Parkinglotracer »

G fund has been the best performing part of my Portfolio YTD basically yielding nothing. Well other than my ibonds.

Blind luck.
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Re: G Fund in the current environment

Post by jebmke »

Parkinglotracer wrote: Thu Sep 15, 2022 1:52 pm G fund has been the best performing part of my Portfolio YTD basically yielding nothing. Well other than my ibonds.

Blind luck.
How does it look over some longish period of time -- say 20-30 years -- versus bonds? That is, how do stable value funds perform relative to similar, but unstable assets? I've never really looked at them since I have never had access to stable value funds.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: G Fund in the current environment

Post by rkhusky »

jebmke wrote: Thu Sep 15, 2022 2:39 pm
Parkinglotracer wrote: Thu Sep 15, 2022 1:52 pm G fund has been the best performing part of my Portfolio YTD basically yielding nothing. Well other than my ibonds.

Blind luck.
How does it look over some longish period of time -- say 20-30 years -- versus bonds? That is, how do stable value funds perform relative to similar, but unstable assets? I've never really looked at them since I have never had access to stable value funds.
If you average over a bond market cycle where the starting and ending interest rates are the same and also both rising, I would guess that the returns of G and Int Treasury would be about the same, but G would be a lot less volatile. You might need a period more than 30 years.
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Re: G Fund in the current environment

Post by Parkinglotracer »

jebmke wrote: Thu Sep 15, 2022 2:39 pm
Parkinglotracer wrote: Thu Sep 15, 2022 1:52 pm G fund has been the best performing part of my Portfolio YTD basically yielding nothing. Well other than my ibonds.

Blind luck.
How does it look over some longish period of time -- say 20-30 years -- versus bonds? That is, how do stable value funds perform relative to similar, but unstable assets? I've never really looked at them since I have never had access to stable value funds.
On the tsp.gov website the cumulative average annual return for the G fund has been 4.68% and the F fund has been 5.49% to date, aggregate bond index was 5.47% during that time. they both started in the 1988 timeframe. Wish I had more than 5% of my portfolio in it.
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Re: G Fund in the current environment

Post by placeholder »

jebmke wrote: Thu Sep 15, 2022 6:31 am My understanding is that the G fund is a stable value fund. I’d expect rates to lag the market rates in both directions.
It is but the lag is pretty small because the rate is set each month based on the weighted average of treasuries with duration longer than 4 years which is unlike a common stable value fund that owns securities with insurance wrappers.
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Re: G Fund in the current environment

Post by Valuethinker »

MandyLuna wrote: Thu Sep 15, 2022 6:17 am Please excuse my lack of knowledge regarding the G Fund. I hold some of it in my TSP and always understood it to track longer term bond rates - while at the same time being a guaranteed return, even if low.

All that said, in an environment of raising interest rates, we can expect the G Fund to have increasing returns in the near and farther term as long as interest rates are rising? I hold some short term bond funds, so I see some increases there.
I think the bottom line is you can't do better than TSP G fund for an asset of that class.

As I understand it, it is:

- cash like, offering 100% liquidity & the credit rating of the US Federal govt (ie the best)
- because its interest rate is based on 4yr+ bonds, and the yield curve (maturity on the x, yield on the y axis) is normally upward sloping, it offers significantly higher returns in the long run than other cash-like assets, without the price volatility of a ST bond fund

So basically it's an amazing investment for the cash part of your portfolio. In periods of rising interest rates, it should outperform bond funds. In periods of falling or stable interest rates, a bond fund, which takes duration risk, should outperform it on average
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Re: G Fund in the current environment

Post by SquawkIdent »

Valuethinker wrote: Fri Sep 16, 2022 11:33 am
MandyLuna wrote: Thu Sep 15, 2022 6:17 am Please excuse my lack of knowledge regarding the G Fund. I hold some of it in my TSP and always understood it to track longer term bond rates - while at the same time being a guaranteed return, even if low.

All that said, in an environment of raising interest rates, we can expect the G Fund to have increasing returns in the near and farther term as long as interest rates are rising? I hold some short term bond funds, so I see some increases there.
I think the bottom line is you can't do better than TSP G fund for an asset of that class.

As I understand it, it is:

- cash like, offering 100% liquidity & the credit rating of the US Federal govt (ie the best)
- because its interest rate is based on 4yr+ bonds, and the yield curve (maturity on the x, yield on the y axis) is normally upward sloping, it offers significantly higher returns in the long run than other cash-like assets, without the price volatility of a ST bond fund

So basically it's an amazing investment for the cash part of your portfolio. In periods of rising interest rates, it should outperform bond funds. In periods of falling or stable interest rates, a bond fund, which takes duration risk, should outperform it on average
+1

Great description of the fund. It is the reason I still have funds in the TSP. Without it…I’m out.
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Re: G Fund in the current environment

Post by retiredjg »

G Fund in the current environment
I think the G Fund is a good investment in any environment.
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Re: G Fund in the current environment

Post by cowbman »

Historically stock funds do better than the G fund, but the old adage, "past performance is no guarantee of future returns." However, you could do worse than the G fund in a rising interest environment. When rates are 0 (or close to it), I would probably not allocate much to the G fund.
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Re: G Fund in the current environment

Post by L84SUPR »

vineviz wrote: Thu Sep 15, 2022 8:53 am IMHO investors should not pretend that they ever know what kind of "rate environment" they are in or will be in.

Your asset allocation should be based on your circumstances, not on market predictions.
I concur. In 14 months I will have seven years of social security bridge in the G Fund. It took a fair amount of discipline to built the bridging fund when stocks were going up but we now have about the best retirement date risk mitigation one could ask for. I almost don't care what stocks do in the next 8 years as long as they have beaten inflation at that time (although I would really prefer that they double).

I believe the applicable axiom is be conservative the 5 years before and the 5 years after retirement. Which is our circumstances.
1/3rd VTWAX, 1/3rd Wellington, 1/3rd G Fund | All models are wrong. Some are useful.
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Re: G Fund in the current environment

Post by rkhusky »

L84SUPR wrote: Sat Oct 22, 2022 10:17 am
vineviz wrote: Thu Sep 15, 2022 8:53 am IMHO investors should not pretend that they ever know what kind of "rate environment" they are in or will be in.

Your asset allocation should be based on your circumstances, not on market predictions.
I concur. In 14 months I will have seven years of social security bridge in the G Fund. It took a fair amount of discipline to built the bridging fund when stocks were going up but we now have about the best retirement date risk mitigation one could ask for. I almost don't care what stocks do in the next 8 years as long as they have beaten inflation at that time (although I would really prefer that they double).

I believe the applicable axiom is be conservative the 5 years before and the 5 years after retirement. Which is our circumstances.
How does the G fund fit into your future plans?

That is, if stocks go further down, will you sell G and buy stocks? If stocks soar, will you sell stocks and buy more G? Will you be withdrawing living expenses strictly from G?
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Re: G Fund in the current environment

Post by retiredjg »

The "current environment" seems great for the G Fund - interest rates are going up, G Fund is paying more....but the value is not going down like a bond fund. Win Win :happy
L84SUPR
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Re: G Fund in the current environment

Post by L84SUPR »

rkhusky wrote: Sat Oct 22, 2022 12:35 pm
L84SUPR wrote: Sat Oct 22, 2022 10:17 am
vineviz wrote: Thu Sep 15, 2022 8:53 am IMHO investors should not pretend that they ever know what kind of "rate environment" they are in or will be in.

Your asset allocation should be based on your circumstances, not on market predictions.
I concur. In 14 months I will have seven years of social security bridge in the G Fund. It took a fair amount of discipline to built the bridging fund when stocks were going up but we now have about the best retirement date risk mitigation one could ask for. I almost don't care what stocks do in the next 8 years as long as they have beaten inflation at that time (although I would really prefer that they double).

I believe the applicable axiom is be conservative the 5 years before and the 5 years after retirement. Which is our circumstances.
How does the G fund fit into your future plans?

That is, if stocks go further down, will you sell G and buy stocks? If stocks soar, will you sell stocks and buy more G? Will you be withdrawing living expenses strictly from G?
Begining when I retire in January 2024 I will withdraw from either G Fund from TSP or VTWAX from my 401k in order to follow my post retirement AA plan which is a downward ramp from 50S/50B at retirement to 80S/20B in 2031 when I will take Social Security.

I'm at 50S/50B now, counting G Fund as bonds. If in January 2024 stocks are at current levels or lower all distributions will be from the G Fund for the first year. If stocks have substantially recovered I may have to take from VTWAX to follow my AA ramp.

There is no trading or rebalancing in the first seven years of my plan. Just a decision at the beginning of each year regarding which fund to draw from in order to move back toward the target AA for that year.
1/3rd VTWAX, 1/3rd Wellington, 1/3rd G Fund | All models are wrong. Some are useful.
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Re: G Fund in the current environment

Post by rkhusky »

L84SUPR wrote: Sat Oct 22, 2022 1:34 pm
rkhusky wrote: Sat Oct 22, 2022 12:35 pm
L84SUPR wrote: Sat Oct 22, 2022 10:17 am
vineviz wrote: Thu Sep 15, 2022 8:53 am IMHO investors should not pretend that they ever know what kind of "rate environment" they are in or will be in.

Your asset allocation should be based on your circumstances, not on market predictions.
I concur. In 14 months I will have seven years of social security bridge in the G Fund. It took a fair amount of discipline to built the bridging fund when stocks were going up but we now have about the best retirement date risk mitigation one could ask for. I almost don't care what stocks do in the next 8 years as long as they have beaten inflation at that time (although I would really prefer that they double).

I believe the applicable axiom is be conservative the 5 years before and the 5 years after retirement. Which is our circumstances.
How does the G fund fit into your future plans?

That is, if stocks go further down, will you sell G and buy stocks? If stocks soar, will you sell stocks and buy more G? Will you be withdrawing living expenses strictly from G?
Begining when I retire in January 2024 I will withdraw from either G Fund from TSP or VTWAX from my 401k in order to follow my post retirement AA plan which is a downward ramp from 50S/50B at retirement to 80S/20B in 2031 when I will take Social Security.

I'm at 50S/50B now, counting G Fund as bonds. If in January 2024 stocks are at current levels or lower all distributions will be from the G Fund for the first year. If stocks have substantially recovered I may have to take from VTWAX to follow my AA ramp.

There is no trading or rebalancing in the first seven years of my plan. Just a decision at the beginning of each year regarding which fund to draw from in order to move back toward the target AA for that year.
If you are going from 50/50 to 80/20 (stock/bond), you will likely be pulling from the G fund. But you never know. Sounds like a simple plan, which are the easiest to stick with.
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Re: G Fund in the current environment

Post by muel87 »

Valuethinker wrote: Fri Sep 16, 2022 11:33 am - cash like, offering 100% liquidity & the credit rating of the US Federal govt (ie the best)
Only if you're 59.5 years old. I am 41, and trying to determine if I should invest my 20% bond allocation there as I have access to it, but I think all the threads im reading are written with an assumption that I can spend it or will need it soon.
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Re: G Fund in the current environment

Post by NiceUnparticularMan »

muel87 wrote: Mon Feb 06, 2023 8:37 pm I am 41, and trying to determine if I should invest my 20% bond allocation there as I have access to it, but I think all the threads im reading are written with an assumption that I can spend it or will need it soon.
So if you look at the L Fund 2050 and 2045 (assuming a retirement at 65, you would be looking at about 2047), they both have more G than F Fund by that point (there is more F than G in 2065 and 2060, about the same in 2055, although it is only a small amount of both in those funds). They also average similarly to your 20% total. Specifically, those two funds average 7.7% F and 13.1% G.

At a high level, their models suggest even that far out from retirement, the G Fund's relatively low volatility, reliably low correlation with stocks, and positive correlation with unexpected inflation are sufficiently useful to warrant its increasing use as the glidepath begins to shift from almost all stocks.
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Re: G Fund in the current environment

Post by muel87 »

NiceUnparticularMan wrote: Mon Feb 06, 2023 10:47 pm They also average similarly to your 20% total. Specifically, those two funds average 7.7% F and 13.1% G.
At which L fund? 2055? 2045? (2045 would be closest to my situation).
NiceUnparticularMan wrote: Mon Feb 06, 2023 10:47 pm At a high level, their models suggest even that far out from retirement, the G Fund's relatively low volatility, reliably low correlation with stocks, and positive correlation with unexpected inflation are sufficiently useful to warrant its increasing use as the glidepath begins to shift from almost all stocks.
I guess I could look at the lifecycle funds and mirror that allocation, but I can only invest about 25% of my current bond position in G anyway, so looking for the best strategies to round that out (TIPS/BND/global bond index)
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Re: G Fund in the current environment

Post by retiredjg »

muel87 wrote: Tue Feb 07, 2023 6:29 am I guess I could look at the lifecycle funds and mirror that allocation, but I can only invest about 25% of my current bond position in G anyway, so looking for the best strategies to round that out (TIPS/BND/global bond index)
For a simple approach, I'd suggest the G Fund to the extent you can and BND for the rest. Global index if you want (but does it contain US too?). If you are working, I don't see the need for G Fund and TIPS both - G fund and your salary should be helping you keep up with inflation.
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Re: G Fund in the current environment

Post by NiceUnparticularMan »

muel87 wrote: Tue Feb 07, 2023 6:29 am
NiceUnparticularMan wrote: Mon Feb 06, 2023 10:47 pm They also average similarly to your 20% total. Specifically, those two funds average 7.7% F and 13.1% G.
At which L fund? 2055? 2045? (2045 would be closest to my situation).
That was an average of '50 and '45. '45 specifically is at 7.78% F, 15.47% G.
NiceUnparticularMan wrote: Mon Feb 06, 2023 10:47 pm At a high level, their models suggest even that far out from retirement, the G Fund's relatively low volatility, reliably low correlation with stocks, and positive correlation with unexpected inflation are sufficiently useful to warrant its increasing use as the glidepath begins to shift from almost all stocks.
I guess I could look at the lifecycle funds and mirror that allocation, but I can only invest about 25% of my current bond position in G anyway, so looking for the best strategies to round that out (TIPS/BND/global bond index)
So of course nothing is quite like the G Fund, but I think TIPS are in some notable ways the next best thing (FYI, the TSP managers have argued they don't need a TIPS fund because the G Fund can largely serve similar purposes). At your time horizon, I personally think you could do long-term TIPS (like LTPZ), particularly if you are mixing in G Fund.

I don't see a pressing need for this myself, but BND is equivalent to the F Fund, and I think you could equally well use BNDW (Vanguard thinks you should, DFA does too, and I think going global with your nominal bonds in accumulation is no worse than harmless and could be minorly helpful).

So maybe something like 1/4 BNDW, 1/2 LTPZ, 1/4 G? Give or take.
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Re: G Fund in the current environment

Post by NiceUnparticularMan »

retiredjg wrote: Tue Feb 07, 2023 7:09 am If you are working, I don't see the need for G Fund and TIPS both - G fund and your salary should be helping you keep up with inflation.
As always, the question is why you have any bonds deep in accumulation.

But in the empirical work I have seen, if you are a USD investor still pretty deep in accumulation, and using something like the G Fund or a stable value fund, the next plausible fixed income addition to an efficient portfolio is not US intermediate corporates and Treasuries (like in BND), but either long-term Treasuries or possibly ex-US bonds. And if you are at the point you are beginning to manage sequence of returns risk in advance (and the OP is right at the point when many companies and the TSP think you should be beginning that process), then you should logically be looking at long-term IP bonds.

Or to put it another way, LT government bonds, bonds outside your home country, and IP bonds are all plausibly giving you something significantly different from what you can get from a combination of stocks and the G Fund/stable value fund. High-quality nominal intermediate bonds from your home country? Eh, not as promising.

I do agree the G Fund can potentially just substitute for all of that. But personally, if I was looking to do more than just the G Fund at the OP's stage, I would be looking first at LT TIPS, and then maybe at global bonds.
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Re: G Fund in the current environment

Post by retiredjg »

Some thought has to be given to where these bonds are going to be held. If it is a work plan, which is a very common location for your bond allocation, you have to take what you can get. That often does not include things like LT TIPS or an international bond fund.

An investor should start with looking at what is available and the costs of those funds, not what one would hold if you could have anything you want.
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Re: G Fund in the current environment

Post by NiceUnparticularMan »

retiredjg wrote: Tue Feb 07, 2023 8:41 am Some thought has to be given to where these bonds are going to be held. If it is a work plan, which is a very common location for your bond allocation, you have to take what you can get. That often does not include things like LT TIPS or an international bond fund.

An investor should start with looking at what is available and the costs of those funds, not what one would hold if you could have anything you want.
That's fair. I note an employer plan these days might or might not have a stable value fund, which would also be worth considering.
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Re: G Fund in the current environment

Post by AnonJohn »

I'm a big fan of the G-fund. It is a way to hold long-term bonds without the downside of short-term principal loss in a rising rate environment. It was (with i-bonds) my only bond holding for a lot of years. That said, I currently have no G-fund holdings, as I think there are slightly better options if you want to chase interest rates while holding risk roughly constant (and roughly zero): T-bills.

Rationale: The inverted yield curve we have now means that shorter duration t-bills perform better than the longer-term bonds held in the g-fund. Specifically: G-fund is yielding 4%; VUSXX is 4.36%, and 6 month t- bills about 4.7%. If you think rates will rise in 6 months the one month rate is about 4.5%. All better than the g-fund.

When the curve shifts back to something more normal I will move back to the g-fund. Whether it is worth the effort is up to you. This strategy requires having money somewhere other than the TSP to buy bonds and rebalance. I use a taxable account and my IRA. It's easy enough to buy t-bills through Vanguard (or others) or even treasurydirect.
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Re: G Fund in the current environment

Post by NiceUnparticularMan »

AnonJohn wrote: Tue Feb 07, 2023 9:21 am I'm a big fan of the G-fund. It is a way to hold long-term bonds without the downside of short-term principal loss in a rising rate environment. It was (with i-bonds) my only bond holding for a lot of years. That said, I currently have no G-fund holdings, as I think there are slightly better options if you want to chase interest rates while holding risk roughly constant (and roughly zero): T-bills.

Rationale: The inverted yield curve we have now means that shorter duration t-bills perform better than the longer-term bonds held in the g-fund. Specifically: G-fund is yielding 4%; VUSXX is 4.36%, and 6 month t- bills about 4.7%. If you think rates will rise in 6 months the one month rate is about 4.5%. All better than the g-fund.

When the curve shifts back to something more normal I will move back to the g-fund. Whether it is worth the effort is up to you. This strategy requires having money somewhere other than the TSP to buy bonds and rebalance. I use a taxable account and my IRA. It's easy enough to buy t-bills through Vanguard (or others) or even treasurydirect.
Yes, the G Fund makes an excellent partner for arbitraging an inverted yield curve, assuming you have the non-TSP account necessary for that purpose.

It is typically going to be a smallish margin that probably won't last long, but if you are talking about a large holding then it might well be worth the relatively minor effort it takes.

Here is an older chart that shows the periods where you could have (briefly) arbitraged T-Bill (or money market) rates:

Image

Although not quite the same (since it is using the 10-year rate and not the G Fund rate, although they tend to be very close), this chart is good enough to indicate the approximate scale and duration of such periods over a longer sample, through the present:

Image

So yes, right now is a good time to do this (indeed, the best yet), assuming you have the necessary accounts and don't mind the effort.
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Re: G Fund in the current environment

Post by AnonJohn »

Beautifully done on the data and plots side. Some approximations but I found it very interesting. Thanks!
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Re: G Fund in the current environment

Post by muel87 »

NiceUnparticularMan wrote: Tue Feb 07, 2023 8:22 am So of course nothing is quite like the G Fund, but I think TIPS are in some notable ways the next best thing (FYI, the TSP managers have argued they don't need a TIPS fund because the G Fund can largely serve similar purposes). At your time horizon, I personally think you could do long-term TIPS (like LTPZ), particularly if you are mixing in G Fund.

I don't see a pressing need for this myself, but BND is equivalent to the F Fund, and I think you could equally well use BNDW (Vanguard thinks you should, DFA does too, and I think going global with your nominal bonds in accumulation is no worse than harmless and could be minorly helpful).

So maybe something like 1/4 BNDW, 1/2 LTPZ, 1/4 G? Give or take.
I read that the US bond market is about 40% of the global bond market. I read a lot about the need to diversify stock w/ international stock, but not as much about the need to hold global bonds. But maybe I just havent read enough. Would doing BND be the same as buying BND and BNDX in a 40/60 ratio?
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Re: G Fund in the current environment

Post by muel87 »

NiceUnparticularMan wrote: Tue Feb 07, 2023 9:46 am
Yes, the G Fund makes an excellent partner for arbitraging an inverted yield curve, assuming you have the non-TSP account necessary for that purpose.

It is typically going to be a smallish margin that probably won't last long, but if you are talking about a large holding then it might well be worth the relatively minor effort it takes.
Just to be clear, what other type of account are we talking about?
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Re: G Fund in the current environment

Post by AnonJohn »

Any account where you can buy t-bills (or, hold a pure t-bill mutual fund, though not quite as good). I can do this with any of my Vanguard IRAs (mine and my wife's, Roth or regular) or through my taxable account at Vanguard, or at TreasuryDirect (also taxable account, just not at Vangaurd).
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Re: G Fund in the current environment

Post by NiceUnparticularMan »

muel87 wrote: Tue Feb 07, 2023 10:38 am I read that the US bond market is about 40% of the global bond market. I read a lot about the need to diversify stock w/ international stock, but not as much about the need to hold global bonds. But maybe I just havent read enough.
So whether or not to buy bonds outside your home country is a complicated topic, and it depends on the purpose of those bonds in your overall portfolio.

Generally speaking, if you are a USD spender trying to do something like manage Sequence of Real Returns Risk around the time you retire, such bonds will be dominated by something like the G Fund or TIPS. Meaning you will want few if any such bonds for that purpose. But the same is true of nominal bonds like those in BND.

The other main purpose for personal savers holding bonds is to improved the risk-adjusted returns of the risky part of their portfolio, over say just using stocks for that purpose. There isn't really a strong, forward-looking case for using bonds for that purpose, but possibly a small allocation to ex-US bonds would be part of such a plan.

The immediate issue, though, is whether you should hedge or not hedge those ex-US bonds. If you hedge them, they start behaving a lot like high-quality US bonds, but there might still be a VERY small benefit to a modest allocation to such bonds. If you don't hedge them, they can behave a lot differently, but the difference is dominated by currency effects.

And mostly currency effects are not useful, although there is some implied USD-devaluation hedging involved. But then there is a question of whether that is an efficient way to hedge that risk, particularly if you already have ex-US stocks and TIPS/G Fund . . . .

So personally, I don't particular see a need to invest in ex-US bonds, hedged or unhedged. But I also don't see a need to invest in anything but TIPS and the G Fund (or equivalent) in the first place.

If you do see a reason to invest in the bonds in BND, then you might think it makes sense to use BNDW instead.

Or you can use BND and BNDX if you prefer (or F and BNDX for that matter). I think it would be more like 50/50, though, instead of 60/40.

But if you use hedged bonds, like in BNDW or BNDX . . . you really need to be holding a LOT of these bonds for it to make much of a difference. Like if for some reason you are 100% nominal bonds, it might be a little more pressing. If you are like 60% global stocks, 30%+ TIPS or G Fund--eh, whether that last 10% is all F/BND, or 10% BNDW, or 5% F/BND, 5% BNDX, is unlikely to make any noticeable difference, again thanks to the hedging.
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Re: G Fund in the current environment

Post by NiceUnparticularMan »

muel87 wrote: Tue Feb 07, 2023 10:41 am
NiceUnparticularMan wrote: Tue Feb 07, 2023 9:46 am
Yes, the G Fund makes an excellent partner for arbitraging an inverted yield curve, assuming you have the non-TSP account necessary for that purpose.

It is typically going to be a smallish margin that probably won't last long, but if you are talking about a large holding then it might well be worth the relatively minor effort it takes.
Just to be clear, what other type of account are we talking about?
So to elaborate, you need a non-TSP account where you can buy the arbitrage asset in as large a quantity as you want to arbitrage G, and then swap back to whatever else you invest in when you don't want to arbitrage G.

Like, let's say your target is 20% G, 80% global stocks. Let's say you have a TSP account that is 20% of your portfolio, and a 401K/IRA which is 80% of your portfolio. With a normal yield curve, your TSP is all G, and this other account is all global stocks.

But then the yield curve inverts. You sell the G in the TSP and buy C/S/I (aka global stocks). You sell 20% of the stocks in this other account and buy 20% of money market, TBills, whatever you are using to arbitrage.

OK, then the yield curve normalizes. You sell the MM/TBills/whatever in this other account and buy global stocks. And you sell the C/S/I in the TSP account and buy G.

So, the basic requirements are you need this other account, it needs to have ability to swap back and forth between the arbitrage asset and whatever your normally invest in, and it needs to be big enough (although if it is too small you can still do some of this, just not for the full amount of the G Fund allocation).
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Re: G Fund in the current environment

Post by muel87 »

NiceUnparticularMan wrote: Tue Feb 07, 2023 11:18 am The other main purpose for personal savers holding bonds is to improved the risk-adjusted returns of the risky part of their portfolio, over say just using stocks for that purpose. There isn't really a strong, forward-looking case for using bonds for that purpose, but possibly a small allocation to ex-US bonds would be part of such a plan.
Meaning there isnt a strong case for using ex-US bonds for that purpose? And how small?
NiceUnparticularMan wrote: Tue Feb 07, 2023 11:18 am The immediate issue, though, is whether you should hedge or not hedge those ex-US bonds. If you hedge them, they start behaving a lot like high-quality US bonds, but there might still be a VERY small benefit to a modest allocation to such bonds. If you don't hedge them, they can behave a lot differently, but the difference is dominated by currency effects.
By hedge ex-US bonds, what method of hedging do you refer to? Or do you mean hedge my entire portfolio by buying some of these bonds?
NiceUnparticularMan wrote: Tue Feb 07, 2023 11:18 am Or you can use BND and BNDX if you prefer (or F and BNDX for that matter). I think it would be more like 50/50, though, instead of 60/40.
Why not a weight of 40% of US bonds if that's what they make up of the world bond market?
NiceUnparticularMan wrote: Tue Feb 07, 2023 11:18 am But if you use hedged bonds, like in BNDW or BNDX . . . you really need to be holding a LOT of these bonds for it to make much of a difference. Like if for some reason you are 100% nominal bonds, it might be a little more pressing. If you are like 60% global stocks, 30%+ TIPS or G Fund--eh, whether that last 10% is all F/BND, or 10% BNDW, or 5% F/BND, 5% BNDX, is unlikely to make any noticeable difference, again thanks to the hedging.
I can only have 5% of current portfolio in G. Would you use TIPS as a rough fill-in for the rest then? Any particular TIPS? I take it your advice would be 100% G/TIPS, and you just threw that 10%/30% ratio out there?
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Re: G Fund in the current environment

Post by NiceUnparticularMan »

muel87 wrote: Tue Feb 07, 2023 3:17 pm
NiceUnparticularMan wrote: Tue Feb 07, 2023 11:18 am The other main purpose for personal savers holding bonds is to improved the risk-adjusted returns of the risky part of their portfolio, over say just using stocks for that purpose. There isn't really a strong, forward-looking case for using bonds for that purpose, but possibly a small allocation to ex-US bonds would be part of such a plan.
Meaning there isnt a strong case for using ex-US bonds for that purpose?
Really any fixed income. There are weak cases offered for longer-term Treasuries and global bonds in some literature I have seen. Nominal corporate bonds I have seen even less support for.
And how small?
DFA, for example, is a nimble, research-driven company. DFA Target 2045 is 15.79% Global bonds, of which about 46% is ex-US bonds, so about 7.3% in ex-US bonds.

Vanguard also likes ex-US bonds a bit. Their Target 2045 is 13.3% bonds, of which about 30%, or 3.9% total, is ex-US bonds.
NiceUnparticularMan wrote: Tue Feb 07, 2023 11:18 am The immediate issue, though, is whether you should hedge or not hedge those ex-US bonds. If you hedge them, they start behaving a lot like high-quality US bonds, but there might still be a VERY small benefit to a modest allocation to such bonds. If you don't hedge them, they can behave a lot differently, but the difference is dominated by currency effects.
By hedge ex-US bonds, what method of hedging do you refer to? Or do you mean hedge my entire portfolio by buying some of these bonds?
No, sorry, that means the bond fund uses currency hedges to offset exchange rate changes between the denominations of the bonds and the target currency of the bond fund. So, for example, hedged ex-US bond funds marketed to US investors have been hedged in USDs.
NiceUnparticularMan wrote: Tue Feb 07, 2023 11:18 am Or you can use BND and BNDX if you prefer (or F and BNDX for that matter). I think it would be more like 50/50, though, instead of 60/40.
Why not a weight of 40% of US bonds if that's what they make up of the world bond market?
I think it is closer to 50/50 when you apply the maturity and quality screens used by those funds (a lot of global fixed income is very short term or below the quality standards set by those funds).
NiceUnparticularMan wrote: Tue Feb 07, 2023 11:18 am But if you use hedged bonds, like in BNDW or BNDX . . . you really need to be holding a LOT of these bonds for it to make much of a difference. Like if for some reason you are 100% nominal bonds, it might be a little more pressing. If you are like 60% global stocks, 30%+ TIPS or G Fund--eh, whether that last 10% is all F/BND, or 10% BNDW, or 5% F/BND, 5% BNDX, is unlikely to make any noticeable difference, again thanks to the hedging.
I can only have 5% of current portfolio in G. Would you use TIPS as a rough fill-in for the rest then? Any particular TIPS? I take it your advice would be 100% G/TIPS, and you just threw that 10%/30% ratio out there?
I wouldn't necessarily insist on TIPS this far out from retirement. What I personally did at that point is use almost exclusively a stable value fund + a cash balance pension, and less of it total than 20%. I then started ramping up the stable value fund, added a little TIPS, and now I am rapidly ramping up the TIPS in anticipation of possible early retirement. I am also planning to eventually swap the stable value fund for the G Fund at retirement. Not sure about the cash balance pension yet as it has some potentially interesting annuity options too.

OK, so eventually I plan to be a combination of TIPS, G, and maybe annuities. But at your point, I was just stable value and cash-balance pension.

However, it is true none of that was (and maybe never will be) marketed nominal bonds, US or ex-US.

But if you wanted nominal bonds and wanted to do something like BNDW at 15% and G at 5%, I wouldn't think that was obviously wrong--indeed, it is sort of a version of what DFA or Vanguard are doing at this point, and that to me means it is at least within the reasonable range of choices.

But I would personally be planning to start phasing in TIPS, and more G and less BNDW, as retirement got closer.
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Re: G Fund in the current environment

Post by muel87 »

NiceUnparticularMan wrote: Tue Feb 07, 2023 3:58 pm
OK, so eventually I plan to be a combination of TIPS, G, and maybe annuities. But at your point, I was just stable value and cash-balance pension.
Thanks for all that. So are the TIPS only b/c you cant add more G fund? I thought that G fund gave you the same inflation protection of TIPS but with principal protection / less volatility.
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Re: G Fund in the current environment

Post by muel87 »

NiceUnparticularMan wrote: Tue Feb 07, 2023 3:58 pm But I would personally be planning to start phasing in TIPS, and more G and less BNDW, as retirement got closer.
Oh, and what about I bonds? How would you think about those?
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