[TSP_Strategy] Re: What Happens When the Fed Raises Rates?

 

mustang_ret

 

For every 1% rise in interest rates, the capital loss to the TSP F fund will be 5%.  Since the current yield for the TSP F fund is approx. 2.18% if they manage to raise interest rates only half a percent this year that would more than wipe out the yield and the F fund would have a slight loss. 

Understand there is not a direct relationship between how much the Fed raises rates on T-bills and the securities held in the TSP F fund but they should start nudging up.  In a perfect world you would sit out of the TSP F fund while rates are rising (due to capital losses) and then jump back in once the new rates stabilize at a higher level.

What a lot of people do not realize is the TSP G fund's interest rate today is about the same as the TSP F fund yield.   The G fund comes with practically no risk and will not sustain capital losses if interest rates rise.  The TSP G fund underperformed the TSP F fund when interest rates were declining because the F fund captured the capital gains from declining rates.  The TSP G fund has become a no-brainer since there is more potential for F fund capital losses than gains currently. 

 

At this point in time, the only time I would chose the TSP F fund over the TSP G fund is when you believe interest rates will fall.  If the US economy falls into recession, interest rates could fall again and the Fed would reverse course.   But I would only stay in the F fund while rates were actually falling.

Since the TSP G fund's interest rate is formula based on long term treasuries and not the short term treasuries, the G fund's interest rate rise will be delayed.  It takes time before the longer term securities move higher. 

 

I provided a comparison page between the TSP F and G fund on my website with a little more info that might help.  You can view it at https://tspsmart.com/Compare-TSP-F-&-G-funds.

Michael from TSPsmart.com

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Posted by: michaelhbond@yahoo.com

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Ditulis oleh: Andriansyah -