I agree with everything Sarah stated, but I thought it might be worth adding a couple of thoughts.
A Global Feedback Loop
When the Fed tightened US monetary the last time with both talk and finally a small rise in rates, there was a global feedback loop that caused long-term interest rates in the US to *decline* (after an initial bounce). It may have happened anyway with the global dive into negative interest rates, but the diverging policies led to a surge in the US dollar. With anywhere between 9 to 12 trillion US dollars loaned out in foreign markets the surging dollar caused a lot of distress in emerging markets and helped put the brakes on the global economy. This led to more easing overseas and thus more money flowing into US long bonds in search of yield (and currency protection).
So in a perverse way if Yellen raises interest rates, the shorter duration US bonds rates will be pushed up but the longer duration bonds 6 months out could be lower if we get a repeat.
So what does this mean to the TSP F and G fund?
The TSP F fund's duration is between 5 - 7 years so its yield is sandwiched between the long and short duration rates. I would expect its yield to bounce around near its current level and this implies no significant capital gains or loses until something gives.
The TSP G fund does not experience capital gains or losses since it is a virtual fund and it carries a weighted average interest rate on long term US Treasuries. It is a very safe fund, but may see its interest rate decline slightly with long term rates (without capturing the capital gain). But remember there is no default risk in the G fund.
You are getting about 1.8% yield on the TSP F fund today. Its expected annual return for the next 5 years is also 1.8%. But it comes with default risk of its securities. The only time to be in the TSP F fund instead of the TSP G fund is when you think interest rates of the 5 - 7 year duration are going to drop in order to capture capital gains. In other words, once the Fed reverses course and starts easing again.
I do expect to see the 5 - 7 duration interest rates bounce higher when they finally raise rates or leading up to it. That would result in capital losses in the F fund, but nothing close to what should be coming to the stock market in the next couple of years.
Michael Bond
TSPsmart.com
PS. One other risk to the F fund (and stock market) is that the other central bankers come to their senses and stop driving interest rates into the grave.
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Posted by: Michael Bond <michaelhbond@yahoo.com>
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Neither the TSP Strategy group, nor individual members, are licensed or authorized to provide investment advice. Any statements made herein merely reflect the personal opinions of the individual group member. Please make your own investment decisions based upon your personal circumstances.
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