How does the G-Fund Work?

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usermane
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How does the G-Fund Work?

Post by usermane » Tue Feb 16, 2021 10:47 pm

I've been reading this forum for a while and want to implement a Permanent Portfolio/Golden Butterfly investment style strategy. I have a few questions about specifics.

I'm a US federal employee and have access to the TSP. That includes the G-Fund (https://www.tsp.gov/funds-individual/g-fund/) which is basically a money market fund that always makes the yield on the ten year treasury. It is legally barred from declining in nominal value, but also can't rise in value. So my question is whether it works as Cash, LT Bonds, or something else?

My current plan is

6-months living expenses in an emergency fund (not counted)

15% Physical Gold
10% Gold etfs (in an IRA)
20% G-Fund
5% EDV (I want more volatility)
20% US Small Caps (S-Fund in TSP, VIOV and EES in IRA)
20% Foreign Stocks (I-Fund in TSP, AVDV and DGS in IRA)
10% Utilities (in an IRA)

I'm also allocation constrained, since the majority of my savings have to be in the TSP if I'm not going to lose out on tax advantages. No in service transfers allowed, so I can't buy LT bonds with that cash, only the G-Fund. Roughly half of my savings are in the TSP, so 20% G, 15% S, and 15% I. The rest is in IRAs, bank accounts, or bullion.

So 25% Gold, 25% Bonds, 50% Stocks. Between the emergency fund, government employment, and the nominal guarantee, I feel okay being light on cash in recessions. This would be 85% of my savings, variable portfolio in home downpayment cash or digital assets, mostly ETH.
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Hal
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Re: How does the G-Fund Work?

Post by Hal » Wed Feb 17, 2021 5:07 am

usermane wrote:
Tue Feb 16, 2021 10:47 pm
So my question is whether it works as Cash, LT Bonds, or something else?
The G fund consists of short term treasuries which is used as a substitute for cash.
So your allocation is 25% Gold, 50% Shares, 20% Cash, 5% Bonds (EDV)
Perhaps consider increasing your Bond allocation if you wish to implement a PP/GB allocation.
Hope this helps.
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Re: How does the G-Fund Work?

Post by Kbg » Wed Feb 17, 2021 11:29 am

You basically get the return of ITTs with the stability of a money market fund. In it's entire history the G fund has never went down even for a day.
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Re: How does the G-Fund Work?

Post by Kbg » Wed Feb 17, 2021 5:05 pm

MangoMan wrote:
Wed Feb 17, 2021 12:14 pm
Kbg wrote:
Wed Feb 17, 2021 11:29 am
You basically get the return of ITTs with the stability of a money market fund. In it's entire history the G fund has never went down even for a day.
That sounds so awesome it should be restricted to government employees. Regular citizens don't deserve a rigged investment like that. Or a pension.
Yeah sucks to be you. You should try to get a government job. It's pretty awesome. You don't do anything all day long and sit around endlessly figuring out how you can screw everyone over with some new stupid rule. If you create the most new stupid rules of anyone in your agency or create a rule that screws over more people than anyone else's during the year you get a big raise and are inducted into the Deep State.

By the way, why aren't there private sector pensions anymore?
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Re: How does the G-Fund Work?

Post by Kriegsspiel » Wed Feb 17, 2021 5:31 pm

The federal government is hiring dentists. I believe the retirement "vests" after 5 years, so if you want to work for 5 more years you could do it for the government and get a pension.
You there, Ephialtes. May you live forever.
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Re: How does the G-Fund Work?

Post by usermane » Wed Feb 17, 2021 5:45 pm

Hal wrote:
Wed Feb 17, 2021 5:07 am
usermane wrote:
Tue Feb 16, 2021 10:47 pm
So my question is whether it works as Cash, LT Bonds, or something else?
The G fund consists of short term treasuries which is used as a substitute for cash.
So your allocation is 25% Gold, 50% Shares, 20% Cash, 5% Bonds (EDV)
Perhaps consider increasing your Bond allocation if you wish to implement a PP/GB allocation.
Hope this helps.
Kind of. If you consider the bond portion of the permanent portfolio, it has 3 sources of return:

Coupon Yield
Convexity
Roll Yield from the LTTs

The average convexity and coupons are intermediate and cash has no convexity. I can get better than the average coupon of the PP without taking any term risk.

To give an example, I'll use the Vanguard Products

Money Market (VUSXX): Duration 0, Yield .02
G-Fund: Duration 0, Yield 1.125
Long Term Treasuries (VGLT): Duration 18.4, Yield 1.7
STRIPS (EDV): 24.3, Yield 1.9

So a traditional 50/50 Cash/LTT allocation has a yield of .86 and duration of 9.2
3/8 STRIPS, 5/8 MM, which has a yield of .71 and duration of 9.1
3/8 STRIPS, 5/8 G-Fund has a yield of 1.41 and duration of 9.1

The G-Fund cheats and has a higher coupon than it should. I think I should be able to get away with a lower allocation to LTT because my short term coupons are actually intermediate term, but I don't know by how much. 1/4 STRIPS, 3/4 G-Fund? 1/5 STRIPS, 4/5 G-Fund?

So, how much is bond convexity worth when you have to buy it separately from coupons? Or, how does the G-Fund work in the Permanent Portfolio?
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Re: How does the G-Fund Work?

Post by Hal » Wed Feb 17, 2021 6:07 pm

usermane wrote:
Wed Feb 17, 2021 5:45 pm
Hal wrote:
Wed Feb 17, 2021 5:07 am
usermane wrote:
Tue Feb 16, 2021 10:47 pm
So my question is whether it works as Cash, LT Bonds, or something else?
The G fund consists of short term treasuries which is used as a substitute for cash.
So your allocation is 25% Gold, 50% Shares, 20% Cash, 5% Bonds (EDV)
Perhaps consider increasing your Bond allocation if you wish to implement a PP/GB allocation.
Hope this helps.
Kind of. If you consider the bond portion of the permanent portfolio, it has 3 sources of return:

Coupon Yield
Convexity
Roll Yield from the LTTs

The average convexity and coupons are intermediate and cash has no convexity. I can get better than the average coupon of the PP without taking any term risk.

To give an example, I'll use the Vanguard Products

Money Market (VUSXX): Duration 0, Yield .02
G-Fund: Duration 0, Yield 1.125
Long Term Treasuries (VGLT): Duration 18.4, Yield 1.7
STRIPS (EDV): 24.3, Yield 1.9

So a traditional 50/50 Cash/LTT allocation has a yield of .86 and duration of 9.2
3/8 STRIPS, 5/8 MM, which has a yield of .71 and duration of 9.1
3/8 STRIPS, 5/8 G-Fund has a yield of 1.41 and duration of 9.1

The G-Fund cheats and has a higher coupon than it should. I think I should be able to get away with a lower allocation to LTT because my short term coupons are actually intermediate term, but I don't know by how much. 1/4 STRIPS, 3/4 G-Fund? 1/5 STRIPS, 4/5 G-Fund?

So, how much is bond convexity worth when you have to buy it separately from coupons? Or, how does the G-Fund work in the Permanent Portfolio?
Well I look at Bonds slightly differently and focus on the resale value. So in a deflationary environment, bonds rise in value and then can be sold to purchase other assets at depressed prices. Cash & STT's (G-fund) don't rise dramatically in value during a depression, so I don't count them as equivalent to longer term bonds even if the yield is higher.

As an aside, have a look at portfolio charts articles on bonds and cash.

ps:A good read -> https://web.archive.org/web/20160303215 ... sting.com/
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Re: How does the G-Fund Work?

Post by Kriegsspiel » Wed Feb 17, 2021 6:11 pm

usermane wrote:
Wed Feb 17, 2021 5:45 pm
The G-Fund cheats and has a higher coupon than it should. I think I should be able to get away with a lower allocation to LTT because my short term coupons are actually intermediate term, but I don't know by how much. 1/4 STRIPS, 3/4 G-Fund? 1/5 STRIPS, 4/5 G-Fund?

So, how much is bond convexity worth when you have to buy it separately from coupons? Or, how does the G-Fund work in the Permanent Portfolio?
I like the idea of 75% G 25% STRIPS. If there was an N fund I'd throw a bit in there just to make this a GSTRINs allocation.
You there, Ephialtes. May you live forever.
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Re: How does the G-Fund Work?

Post by Kriegsspiel » Wed Feb 17, 2021 6:19 pm

MangoMan wrote:
Wed Feb 17, 2021 6:03 pm
Kriegsspiel wrote:
Wed Feb 17, 2021 5:31 pm
The federal government is hiring dentists. I believe the retirement "vests" after 5 years, so if you want to work for 5 more years you could do it for the government and get a pension.
From what I've been told, the minimum vesting period is 10 years, and then at only a small fraction of your final salary. In any case, where does the govt need dentists? I know some colleagues that worked on the Naval base nearby, and as civilians there was no pension. There is no way in hell I'm joining up at my age. Basic training would kill me, and I'm in great shape for an old fart.
I think the 10 year vesting applies to military.

Regular federal civilians vest at 5 years (page 5). If you look on usajobs for dentists you can find some. There's one open at a prison in Chicago. Yea, that doesn't sound that great, but you get access to the G fund!

Lastly, medical specialists (surgeons, dentists, etc) don't go through basic training. You go in as a commissioned officer. Your old fartiness might get you though, looks like the limits are late 40s.
You there, Ephialtes. May you live forever.
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Re: How does the G-Fund Work?

Post by Kbg » Wed Feb 17, 2021 6:36 pm

Ugg, politics sucked me in again. I'm out on that aspect of the thread.

If you have access to the G Fund, be happy, you are getting a good deal...cash equivalent with ITT returns as mentioned. However, as of today ibonds are a better deal all things being equal. In reality all things are not equal when you throw in all the complexities (i.e. employer match, years to retirement, tax rates etc. etc.) and each individual's case could drive a different optimal.

Given it doesn't fluctuate my recommendation is to treat it like cash. There is zero convexity to it so you will get no zig when stocks zag.
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Re: How does the G-Fund Work?

Post by usermane » Wed Feb 17, 2021 7:04 pm

Kriegsspiel wrote:
Wed Feb 17, 2021 6:11 pm

I like the idea of 75% G 25% STRIPS. If there was an N fund I'd throw a bit in there just to make this a GSTRINs allocation.
I think this is what I'll end up doing. The TSP options are good but limited, so I want to make efficient use of my IRA and HSA space. If only the TSP had a long term bond or gold fund. But those may embarrass congress or the federal reserve.
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Re: How does the G-Fund Work?

Post by ppnewbie » Wed Feb 17, 2021 7:38 pm

That sounds like magic. STT get the yield of ITT's.
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Re: How does the G-Fund Work?

Post by Kbg » Thu Feb 18, 2021 8:22 am

Kriegsspiel wrote:
Wed Feb 17, 2021 6:11 pm
I like the idea of 75% G 25% STRIPS. If there was an N fund I'd throw a bit in there just to make this a GSTRINs allocation.
Interesting idea. More please on the tactical approach for the strip component.
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Re: How does the G-Fund Work?

Post by usermane » Thu Feb 18, 2021 12:12 pm

So I thought about this some more. Yield curve data from here https://www.treasury.gov/resource-cente ... data=yield

The yield curve for treasuries at the start of the month was
02/01/21 0.06 0.07 0.07 0.08 0.08 0.11 0.17 0.42 0.76 1.09 1.66 1.84

If you substitute the 10 year rate for the G-Fund (which is historically an underestimate), then I have my cash earning the 10 year rate of 1.09 The term yield is 10 year - 1 Month, which is 1.03. That is the G-Fund excess return.

The 10 year rate - 25 year rate is the amount I'm short of proper long term coupons, assuming a spherical, frictionless LT bond fund that continuously rebalanced. Interpolating the 25 year to be the average of the 20 and 30 year gives 1.75. This is a linear intercept and the rise of the yield curve looks to decay asymptotically with time, so this should be an underestimate. Fortunately, the yield curve is historically mean reverting in the long term portion, so this estimate should behave better than some economic data.

The LTT coupon includes the 1-Month coupon (mostly, econ is hard), so it has a term yield of 1.69. Therefore, the G-Fund's free term yield is 1.03/1.69 or about 60% of a LTT coupon. I need to do this for a longer data sample to get better estimates, but I'll write python after I think this through.

Taking these numbers, I get about 60% of the term yield of a LTT coupon for free. If interest rates were constant, I could get the same term yield as the PP bonds with 70% of the capital by buying 50% G-Fund, 20% LTT or a ratio of 5/7 G, 2/7 LTT. So that's a starting point for a lower bound on the LTT I need to buy. No ideas about STRIPS yet. 2/7 EDV has duration of 6.9, 2/7 TLT has duration 5.2, so I still need to make a better model.
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Re: How does the G-Fund Work?

Post by Kbg » Thu Feb 18, 2021 1:37 pm

um,

This is just excellent. Very much looking forward to your next iteration. If you don't mind I would suggest trying to factor in some duration analysis. As much as we are comparing the G Fund to ITTs, the fact is they don't behave the same. It would be interesting to bounce your approach against various interest rate scenarios and see what the results are.

I'm all about the PP when it comes to the principle that we can't predict. However, we can forecast accurate scenarios, particularly with bonds, and make a personal risk vs. reward preference decision.
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Re: How does the G-Fund Work?

Post by usermane » Thu Feb 18, 2021 2:37 pm

Had an idea on STRIPS. If you consider STRIPS to be equivalent to buying just the Duration and Roll Yield of a bond fund, then I need to make up the Term yield of a half cash, half LTT fund with just G. Each dollar in the G gets me 60% of the term yield, so 25/31 G, 6/31 EDV replicates the term yield of the PP with a minimum of capital. It has a duration of 4.7.

So I have now bounded the space of portfolios that have strictly better term yield than PP bonds using the G fund. I can either get the same term yield as the PP with much less duration and capital or the same duration with more term yield. Neat.

Most of these functions are non-linear, so approximating them properly will be more complicated. Duration for Yield is non-linear in the G-Fund's favor, since going further out in duration gets you less yield per unit. I get 1 for going out the first ten years, but only .67 for the next ten, and .18 for the ten after that. But duration has return through convexity.

Roll Yield can't be replaced with the G-Fund either, but both EDV and TLT should have it. It should be a function of how steep the curve is between the 30 and 20 year for both etfs.
Kbg wrote:
Thu Feb 18, 2021 1:37 pm
um,

This is just excellent. Very much looking forward to your next iteration. If you don't mind I would suggest trying to factor in some duration analysis. As much as we are comparing the G Fund to ITTs, the fact is they don't behave the same. It would be interesting to bounce your approach against various interest rate scenarios and see what the results are.

I'm all about the PP when it comes to the principle that we can't predict. However, we can forecast accurate scenarios, particularly with bonds, and make a personal risk vs. reward preference decision.
Glad somebody likes this. When I get this finished, a similar analysis should apply to using high yield savings accounts, since those replace money market rates with a higher one. But those are capacity constrained, the ones I've found all have a cap on how much you get interest on. At least my emergency fund makes a decent return.

I wouldn't say treasuries are strictly predictable. Long Term Capital Management went under assuming that. What I'm hoping to be is roughly right rather than precisely wrong.
Last edited by usermane on Fri Feb 19, 2021 10:47 am, edited 1 time in total.
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Re: How does the G-Fund Work?

Post by Kbg » Thu Feb 18, 2021 7:21 pm

usermane wrote:
Thu Feb 18, 2021 2:37 pm
What I'm hoping to be is roughly right rather than precisely wrong.
With any of this stuff, this is the best we can hope for and is a good goal to strive for.
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Re: How does the G-Fund Work?

Post by usermane » Fri Feb 19, 2021 11:02 am

Ran the numbers since 2007. I didn't include 2006 and earlier because 30 year bonds weren't sold in part of 2006.

The yield curve has moved around quite a bit in that time, but the average is 72% of the interpolated 25 year term yield is captured by the 10 year. The data has a max over 100% and is sometimes negative. Let's look at one of those cases, from January 1st, 2007

1 M | 10 Y | 20 Y | 30 Y
4.79 4.68 4.87 4.79

10 year term yield: -.11
25 year term yield: .8

-61% term yield capture

This is a crazy curve. There is no discount for money 30 years from 2007, which, in retrospect, may have been right. Interestingly, the negative and over 100% capture days are temporally clustered, which actually makes sense. Flat Yield Curves mean small shifts in the numbers cause big shifts in percentages. The G-Fund would not have been losing money at least, which is true of all the data. My capture ratio from the 10 year is extreme when the yield curve is flat or inverted.

So I'm going to revise my G-Fund term yield capture estimate up to 66% or 2/3 from 60% or 3/5. This means I should get long term average equivalent coupons from a fund that is 3/4 G 1/4 LTT or 9/11 G 2/11 EDV.

I already know how much EDV I need to match duration, that's the 5/8 G, 3/8 EDV. The right answer is therefore between 2/11 EDV and 3/8 EDV or somewhere between 18-37% EDV The midpoint of those is about 27.5, so my current plan is to set my bond fund balance to about 27.5% EDV whenever I rebalance. I check my investments three times a year and have 40% re-balancing bands, so this shouldn't be too onerous. I will also internally rebalance when EDV falls outside [2/11, 3/8] of the bond allocation, but bonds are still within their band.
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Re: How does the G-Fund Work?

Post by Kbg » Sun Feb 28, 2021 12:17 pm

MangoMan wrote:
Sun Feb 28, 2021 6:45 am
Kbg wrote:
Wed Feb 17, 2021 11:29 am
You basically get the return of ITTs with the stability of a money market fund. In it's entire history the G fund has never went down even for a day.
That sounds so awesome it should be restricted to government employees. Regular citizens don't deserve a rigged investment like that.


tomfoolery wrote:
Sun Feb 28, 2021 1:36 am
Also, if it makes any non-federal employees feel better, all US citizens get to participate in the G-fund by having our tax dollars subsidize the artificially higher return.
Well thanks, buddy. I do feel much better now!
All this stuff is in the public domain. Check out the 10 year returns of the G Fund, SHY and IEF.

Yes, everyone should definitely become a government employee so they can get access to the G Fund. It will completely change their financial lives forever. I mean dude just LOOK at those returns. Actually, I need to retract an error. Clearly you do not get the returns of ITTs
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