G Fund no longer keeping pace with inflation

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nps
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G Fund no longer keeping pace with inflation

Post by nps » Sat Mar 07, 2020 10:06 am

Although it's not guaranteed, the Federal Thrift Savings Plan G Fund fact sheet states that the objective of the fund is to maintain a higher return than inflation.

A recent article describes that reductions in long term rates have resulted in the G Fund returning less than inflation for much of the past decade, and especially now.
Currently, the inflation rate is at 2.5%, while the 10-year yield is less than 1.6%. So, in the current rate environment, holders of these treasuries lose approximately 0.9% in purchasing power annually.
And though the article was written less than a month ago, yields on 10-year have plummeted since then.

Does anyone hold the G Fund as a "good enough" inflation hedge? If so, do you see alternatives such as TIPS or I bonds becoming more attractive?

junior
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Re: G Fund no longer keeping pace with inflation

Post by junior » Sat Mar 07, 2020 10:35 am

I believe it's at least kept up with inflation for the last 10 years, I'm eyeballing it but the 10 year G fund return has been 2.23% and inflation has been around 2%. The federal reserve has the stated goal of targeting 2%. I don't know offhand where to get the 10 year year inflation rate but I believe it's either 2% or slightly below 2%.

The fact the G fund is returning less than inflation this month doesn't mean it's returning less than inflation annually or over a longer time period. Stocks have been going down so are also returning less than inflation, that doesn't mean they are expected to return less than inflation over a longer time period.

Long story short: The G fund appears to have kept up with inflation over the last 10 years and I believe the last 5 years. Reading a click-bait article probably isn't a good reason to be concerned.

Edited to add: I don't know how to calculate the expected returns of TIPS to compare and contrast, but presumably there's nothing wrong with a bit of diversification.

junior
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Re: G Fund no longer keeping pace with inflation

Post by junior » Sat Mar 07, 2020 10:47 am

Also that article author seems to be comparing G fund to "medical inflation rate"!!! Well, TIPS aren't indexed to medical inflation rate either! So it doesn't seem actionable.

rkhusky
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Re: G Fund no longer keeping pace with inflation

Post by rkhusky » Sat Mar 07, 2020 9:54 pm

Not sure how the 1.6% rate relates to the G Fund, which has had 1-year, 3-year, 5-year and 10-year annualized returns all above 2.2%.

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nps
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Re: G Fund no longer keeping pace with inflation

Post by nps » Sun Mar 08, 2020 7:01 am

rkhusky wrote:
Sat Mar 07, 2020 9:54 pm
Not sure how the 1.6% rate relates to the G Fund, which has had 1-year, 3-year, 5-year and 10-year annualized returns all above 2.2%.
1.6 percent was the 10-year yield in mid-Feb when this article was posted. The G fund rate in Feb 2020 was 1.625 percent.

Looking at the charts there are times in the past decade when inflation outpaced the 10-year yield but that does not appear to be the trend. So I would also quibble with the claims in the article a bit.

However the 10-year yield today is significantly lower, so who knows what it might look like for this decade. And also what that means for the G fund compared to true inflation-protecting alternatives.

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Re: G Fund no longer keeping pace with inflation

Post by Tdubs » Sun Mar 08, 2020 7:19 am

In recent years, I've looked at G as a partial hedge against inflation, never quite keeping up. This year may be an exception, I expect that inflation will catch-up (catch-down?) to the treasurys that set G Fund rates. There isn't going to be much inflation when gasoline is $1.75/gallon.

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Re: G Fund no longer keeping pace with inflation

Post by junior » Sun Mar 08, 2020 9:55 am

I believe the best hedge against inflation is a 30 year fixed rate mortgage.

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EngCapt1
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Re: G Fund no longer keeping pace with inflation

Post by EngCapt1 » Tue Mar 10, 2020 7:28 am

nps wrote:
Sat Mar 07, 2020 10:06 am
Does anyone hold the G Fund as a "good enough" inflation hedge? If so, do you see alternatives such as TIPS or I bonds becoming more attractive?
We use the G fund for our FI allocation, but we have never had the expectation of it matching or beating inflation alone. I believe the last paragraph in the linked article says it all:
The G Fund, and other U.S. government securities, are considered to have zero default risk. They can’t lose money nominally. However, they can certainly lose purchasing power over long stretches of time, which is unfortunate for savers, and is why a diversified portfolio of many different asset classes is generally a good bet.
Although the current G Fund rate is an abysmal 1.25% this month, it still does what we expect it to do in our portfolio by providing stability in principal while giving us a risk-free intermediate term treasury yield. By maintaining/rebalancing a sensible Equities/G Fund allocation, I fully expect our portfolio as a whole to exceed inflation over the long term while still providing stable income/withdrawals during times of market stress. I don't foresee us making any changes to our G Fund allocation.

:beer

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tarnation
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Re: G Fund no longer keeping pace with inflation

Post by tarnation » Tue Mar 10, 2020 8:56 pm

Just updated my spreadsheet. Although there are a couple of years where it did not keep pace with inflation, there are only two years where it did so back to back. There are no rolling four year periods where it did not outpace inflation.
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Re: G Fund no longer keeping pace with inflation

Post by SteadyOne » Sat May 30, 2020 7:55 am

My understanding is that G Fund is a money market fund with extra above market return courtesy of US Treasury. It works great in times of moderate inflation or may be even high. However, if rates are extremely low like now it delivers below inflation, while there are no capital gains. In times of negative rates if it happens it will return nominal 0 and negative real return. While, 10 year treasury will have good capital gain return in such an environment. Please, correct me if I am wrong.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court

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