TSP G Fund

The TSP G Fund (Government Securities Investment Fund) allows investors to earn interest rates similar to those of long-term U.S. Treasury Bonds, but without any risk of loss of principal. Payment of principal and interest is guaranteed by the U.S. Government, and the G Fund doesn't have any credit or default risk.

The interest paid by the G Fund is set (and is recalculated every month) to the average rate of return of U.S. Treasury securities with 4 or more years to maturity. In the long run, this has worked out to be a good deal: the G Fund has earned a compound annualized return of 4.7% since it was launched in 1987, with practically zero volatility. In the 1980s when interest rates were higher, the G Fund return was almost 9 percent, risk free. The chart below shows the historical performance of the TSP G Fund, and is updated every business day with the latest G Fund price. A $1,000 investment on its 4/1/1987 inception date would be worth $5,674 today:

G Fund Yield Advantage

The G Fund is invested in short-term U.S. Treasury securities specially issued to the Thrift Savings Plan. But the securities actually earn a longer term rate, as mentioned before. And because long-term interest rates are generally higher than short-term rates, the G Fund should earn more than your average ‘safe’ investment like U.S. Treasury Bills or a money market fund. Let’s take a look at how this has worked out in practice:

The historical relationship between G Fund and Treasury Bill rates tells an interesting story. While the above chart shows that the G Fund has consistently delivered premium yields compared to 3-month Treasuries, this advantage wasn’t absolute.

But what about inflation?

As a federal employee relying on the TSP for retirement, you may be wondering: Has the G Fund truly safeguarded your purchasing power against inflation? The brief answer is: in the long run, yes, but with some caveats, as we explore in detail in this article.

Comparing the G Fund to other ‘safe’ investments

While many investments advertise themselves as ‘safe,’ the G Fund offers several advantages over comparable options. Here’s how it stacks up against other low-risk alternatives:

• Money Market Funds: These typically yield less than the G Fund because they invest in very short-term securities. Even the best of the bunch, such as Vanguard Cash Reserves Federal Money Market Fund (VMRXX) has significantly under-performed the G Fund over most time periods.
• Bank CDs: While certificates of deposit can sometimes offer competitive rates, they come with early withdrawal penalties and require locking up your money for fixed periods. The G Fund provides complete liquidity with no penalties, while historically offering returns comparable to medium-term CDs or better. We would also argue that the U.S. government, as the “lender of last resort” during financial crises is significantly more solvent than any individual bank. Older investors may remember how many banks failed during the Global Financial Crisis (GFC) in 2008-2009, and while CDs are FDIC insured, who wants to deal with the stress and hassle of waiting to collect on that insurance?
• High-Yield Savings Accounts: These accounts typically trail the G Fund’s yield by 1-2 percentage points, as banks seek to maximize their profit margin on deposits. The G Fund, by contrast, passes through Treasury rates directly to investors with no profit margin for intermediaries. When banks offer unusually attractive rates (either for savings accounts or CDs), there’s usually a reason for it, such as when they fear an impending liquidity crunch — see above comment about banks during the GFC.
• Treasury Bonds: While individual Treasury bonds can offer similar yields to the G Fund, they expose investors to interest rate risk — their value falls when rates rise. The G Fund uniquely provides Treasury-level yields without this price risk, effectively offering the best features of both short and long-term government securities.

How to use the G Fund in a TSP account

Most investors would like some portion of their retirement account to be completely protected from loss, and the G Fund is the best investment option for this purpose. If however your primary goal is long-term growth and not capital preservation, you have a sufficiently long time before retirement, and you can stomach the sometimes significant volatility of higher risk funds, then in the long run, one of the TSP stock funds such as the C, S, or I Fund have the potential to compound your investment at a higher annual rate.

In our tactical asset allocation strategy, we use the TSP G Fund as the default risk-free investment, allocating some or all of the portfolio to it as stock market conditions start to deteriorate. This allows us to lock in a safe investment return while the investment model waits for bullish market conditions to return.