Are Interest Rates Finally Leveling Off?

What This Means for the G Fund

March 27, 2025

In recent years, interest rates have gone from historic lows to rapid hikes as the Federal Reserve battled inflation.

Now, with signs that inflation is cooling, many TSP participants are asking:

Have we reached the peak? And how will this affect my G Fund returns going forward?

Let’s dive in and find out.

Quick Recap: How the G Fund Works

  • The G Fund is unique—it invests in short-term U.S. Treasury securities specially issued to the TSP.

  • It offers principal protection with no risk of loss and pays interest rates based on long-term Treasuries, not just short-term ones.

  • This means it tends to benefit when interest rates are rising, since new securities are continually issued at higher yields.

The Current Rate Landscape

  • As of March 2025, the Fed has paused interest rate hikes and is signaling potential cuts later this year.

  • Treasury yields have flattened—especially in the 1–5 year range—suggesting that we may be at or near the peak.

  • If rates decline, newly issued securities in the G Fund will reflect lower yields, meaning G Fund returns may decrease over time.

What This Means for TSP Investors

If You’re Heavy in the G Fund:

  • Expect strong short-term yields to taper off if rates begin to fall.

  • G Fund will still be safe, but less rewarding than during rising rate periods.

Consider Your Risk Tolerance:

  • If you’re nearing retirement and want safety, the G Fund remains a solid choice.

  • But for long-term growth, blending in C, S, or L Funds may be necessary to outpace inflation.

Strategy Tip: Don’t Chase Yield—Plan for Balance

  • Diversify across TSP funds based on your retirement horizon and income needs.

  • Watch for interest rate shifts and adjust your fixed-income expectations accordingly.

  • If you're retired or planning withdrawals, this is a good time to revisit your income strategy—possibly laddering withdrawals or combining G Fund with other income sources.

Final Thought: Keep Your Eyes on the Fed, Not the Hype

Interest rates may be stabilizing, but as history shows, markets can change quickly.

The G Fund remains a unique, stable tool in your TSP toolkit—but understanding the interest rate connection helps you make smarter moves.