The TSP G fund’s interest rate at the end of September was 1.56% on an annualized basis. The TSP F fund’s yield as of 27 October was 1.76%.
But interest rates are rising now and by the end of October the G fund rate will be higher. The G fund does not incur capital losses when interest rates rise. The F fund does at a rate of 5 to 1. This means a .35% rise in yields for the 5 to 7-year duration fixed income securities is all that is required to wipe out the current 1.76% yield.
Previously, the Fed’s rate hike on the short end was offset by the declining rates on the long end thanks to the ever-lower push of interest rates into negative territory in Germany and Japan. Germany and Japan have now capitulated on lowering interest rates further because they were having the opposite effect of what they expected. US 10-year treasuries have jumped because their competition the German 10-year Bund’s rates have jumped recently as seen in the chart.
The TSP F fund could get a short-term bump if the SP500 breaks below support in another deep correction (the ice has not broken yet, but it is cracking). Otherwise, the trend of lower interest rates appears to be over. This means the only reason the TSP F fund has beaten the TSP G fund since its inception has come to an end – capital gains from falling interest rates.
Inflation should pick up soon since it was only held down this last year by falling oil prices. Now that the lower oil price can no longer drag inflation down significantly we expect reported inflation to pop back up to 2.5% to 3.0%. This will put more pressure on interest rates to rise and can only be offset by more central bank interventions.
The Federal Reserve understands the inflation situation which is why the Fed chair came out and said that they may run a “high pressure” economy for a while. What is a “high pressure” economy? The fact is they have no control over CPI inflation or PCE inflation so she is simply making it look like they are in control of inflation when they are not.
Fiscal stimulus after the election will help the economy, but it too will support higher inflation (wage push inflation). Fiscal stimulus will not be kind to the financial markets. The fiscal stimulus needed in a recession or to offset a recession will run up US deficits in a hurry. Increased bond supply from the US government in the next few years will require higher interest rates or more debt monetization by the Fed or both.
Lucky for TSPers they have the TSP G fund to ride out the next storm. Take cover.
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Categories: Perspectives, The Smart Bird