rich126 wrote: ↑Wed Jan 11, 2023 8:47 am Is the G fund really better in the long run than simply buying a treasury bill/bond ? For the last year treasury rates would provide better returns but in the long run I'm not sure what the answer is.
So they are two very different types of assets.
What is special about the G Fund is that its crediting rate tracks the weighted average market interest rate of Treasuries with 4+ years of maturity. However, it is guaranteed to have a lossless NAV. So, when market interest rates on nominal Treasuries go up, their prices will go down, as will the NAVs of bond funds holding them. But the G Fund will get the benefit of that interest rate increase without its NAV going down. Of course the opposite is true too--if market interest rates go down, nominal Treasury prices will go up, but not the NAV of the G Fund, even though its crediting rate will go down.
OK, so here are a few implications.
If you buy a share of the G Fund versus an individual nominal Treasury bond at the same time, and the rates are initially comparable (which will only be true at a certain variable point on the yield curve), then if market interest rates on average are higher than at the point of purchase over the life of the bond, the G Fund will return more, and vice versa if market interest rates on average are lower. This may sound like a generally symmetric bet, but it is worth keeping in mind the risks are not really symmetric for a typical personal investor, particularly retirement investors or investors near retirement.
That is because increases in market interest rates will often be associated with other bad things for retirement investors, and decreases in market interest rates will often be associated with other good things. Like, if inflation expectations increase, that is generally a bad thing for retirement investors because they tend to spend in real terms, and market interest rates are more likely to increase under such circ*mstances. Or, if real rates increase, then that is generally a bad thing for at least short-term stock returns, and worse short-term stock returns can be bad for personal investors in or near retirement, and again market interest rates are more likely to increase under such circ*mstances.
This should all sound familiar because both of those things just happened. Inflation expectations increased, real rates also increased, and nominal bonds and stocks were hammered pretty much right about as much as you would expect given the inflation expectation increase combined with the real rate increase. And so market interest rates rose a lot, and now G Fund shares bought before that increase are quite likely to outperform comparable nominal Treasuries bought before that increase, all at a time when that is likely to be most helpful for retirement investors.
Now again, there are scenarios where nominal Treasuries will outperform the G Fund, including scenarios where inflation is lower than expected and where real rates decrease. A lot of those scenarios are good for stocks and good for retirement investors generally, but some are not, like a disinflationary stock crisis. And disinflationary stock crises are pretty common, but most of them end up relatively mild and short-lived. Also, you have to be careful with the math, because even in a disinflationary stock crisis, inflation expectations can go down but real rates can go up, such that there are offsetting effects. Moreover, in a disinflationary scenario, spending is generally costing less than expected, which again can blunt the effects. Nonetheless, there are certainly times when comparable nominal Treasuries would prove more helpful than the G Fund.
The bottom line, though, is that these are not really symmetric risks for retirement investors. Meaning in the scenarios with the most dangerous combinations of factors for retirement investors, the G Fund is likely to be the better choice.
As a final thought, all this is somewhat true when comparing both longer TIPS and cash to longer nominal Treasuries, but with more of a tradeoff.
Longer TIPS also provide protection against unexpected inflation, indeed a bit more efficiently than the G Fund, but they can also get hammered in the short term when real rates increase, as in fact we just saw as well.
Cash, or at least very-short-term TIPS and such, might do a little better in such scenarios, but the cost to holding them long term is usually significantly lower expected returns. Not always--sometimes the yield curve is "inverted" and cash/very-short-term TIPS will briefly do better than longer TIPS and the G Fund as well. But over long periods, the yield curve tends to spend much more time with a significant upward slope than inverted, which means over long periods cash and very-short-term TIPS will likely underperform longer TIPS and the G Fund.
OK, so the G Fund is not completely free from tradeoffs. But it provides significant protection against unexpectedly high inflation, significant protection against increases in real rates, and without the same expected return penalty as long-term positions in cash or very-short-term TIPS.
Pretty cool!
That said, if all goes reasonably well in the years leading up to and during your retirement, it probably won't make much of a difference. Indeed, if things go really well, things might have gone a little better still if you didn't use the G Fund.
But the point is if you get unlucky and hit one of the worst possible scenarios at the wrong time, then the G Fund will potentially prove a significant difference-maker.
