TSP Bond Funds – Which One Makes the Most Sense?

Arthur Stein |
The two bond funds available in the Thrift Savings Plan (TSP) are:
  • The G Fund, which invests solely in short-term U.S. government securities. 
  • The F Fund, which invests in Government, corporate and mortgage backed bonds.
The G Fund is the most popular of all TSP Funds. Only the C Fund comes close. Participant allocations to G are almost eight times as great as to F.
However, the percentage invested in the G Fund declined over the last ten years while C and L Fund allocations were rising.
Source: Federal Retirement Thrift Investment Board Memorandum, February 14, 2020
The popularity of the G Fund is based upon two unique characteristics: it is guaranteed by the U.S. government and it never fluctuates in value. The F Fund does fluctuate in value as interest rates increase and decrease.
The declining popularity of the G Fund is probably a result of the decline in returns. In 1988, the G Fund returned 8.8% for the year. In 2019, the return was only 2.2%, a 75% decline. As of April 2020, the G Fund interest rate was 0.875%. That is 90% lower than 1988!
During that same period, the cost of living (inflation or change in Consumer Price Index) increased 13%.
Falling G Fund returns combined with a rising cost of living caused the purchasing power of the G Fund to decline over time. So, it would make sense that G became less popular if G Fund investors were finally realizing that the price of “safety” was high.
Another question: Why is the G Fund is so much more popular than the F Fund? Performance certainly is not the reason. The F Fund outperformed the G Fund over the last 1, 3, 5, 10 and 15 years.
Even on a calendar year basis, the F Fund was usually the top performer. Comparing calendar year investment returns:
  • The F Fund outperformed or equaled the G Fund 19 times (70%).
  • There were only three calendar years where the F Fund return was negative. 
It appears that government guarantees, and lower volatility are more important than long-term returns for G Fund investors. Which is ironic. The F Fund invests nearly 70% of its assets in U.S. Treasuries and agency mortgaged-backed securities, which carry AAA ratings because the government guarantees them against default. [Note that the U.S. government does not guarantee against shorter-term fluctuations in value.]
Do you have other reasons for preferring G to F or to the stock funds? Please email me if you do.