Some of the conditions for the 2020’s decade are shaping up to be potentially poor for Treasuries, including near-zero yields and the potential for yield curve caps. Will the G Fund growth rate on average be higher than inflation over the next decade? Image: An Mazhor/Shutterstock.com

Lyn Alden

One of the challenges for many investors over the past decade has been the persistence of very low interest rates, which makes it hard for investors to generate suitable returns unless they take on significant equity exposure, which comes with added volatility and capital risk.

When the G Fund was founded in the 1980’s, it paid over 8% per year in interest. The average over the lifetime of the fund since inception has been about 5%. This year, it is only about 0.60%, give or take a few basis points.


The G fund interest rate is determined from a weighted average of intermediate and long duration Treasury securities, and closely mirrors the popular 10-year Treasury yield in practice.

This chart shows the past sixty years of interest rates for the 10-year Treasury yield (blue line), compared to the prevailing official inflation rate (red line):

Chart Source: St. Louis Fed

As the chart shows, in the 1980’s, 1990’s, and kind of in the 2000’s, 10-year Treasury notes paid an interest rate that was well above the official inflation rate. However, in the 2010’s decade, there was very little difference most of the time between the Treasury rate and the inflation rate. Treasuries didn’t lose purchasing power, but they didn’t really gain much either.

In addition, inflation rates vary depending on lifestyle. In general, the prices of goods have gone down, due to technology and offshoring. For example, a good TV today costs a fraction of what it cost ten years ago, despite being superior. On the other hand, services such as healthcare and education have gone up dramatically over the past couple decades, at roughly 5% per year or more.

On the TSP’s G Fund description page, they describe the inflation risk of the G Fund. The principle and interest of the fund is guaranteed by the government in nominal terms, but not necessarily in purchasing power terms: “The G Fund is subject to the possibility that your investment will not grow enough to offset the reduction in purchasing power that results from inflation (inflation risk).”

The Federal Reserve controls the short-term interest rates, and usually lets the market control the rest of the duration spectrum of interest rates, including all of those Treasury yields which the G Fund has exposure to. However, in some circumstances, the Federal Reserve purchases Treasuries to keep their yields low. They did this famously in the 1940’s to fund World War II at low yields, and they did it this year in March and April 2020 when foreigners abruptly sold $300 billion worth of Treasuries during the big period of market volatility during the pandemic-related economic shutdown.


Ever since 2019, and more recently this year, Federal Reserve officials have been discussing yield curve caps, which means the Federal Reserve would effectively print dollars to buy Treasuries as needed, along with forward guidance and other policy tools, to keep their yields below a specific target rate.

Most recently, Fed officials extensively discussed yield curve caps at their June 2020 meeting, and the meeting minutes are available on their website.

One of the most interesting paragraphs discussed tangible examples of yield curve caps from U.S. history and from around the world today:
“The second staff briefing reviewed the yield caps or targets (YCT) policies that the Federal Reserve followed during and after World War II and that the Bank of Japan and the Reserve Bank of Australia are currently employing. These three experiences illustrated different types of YCT policies: During World War II, the Federal Reserve capped yields across the curve to keep Treasury borrowing costs low and stable; since 2016, the Bank of Japan has targeted the 10-year yield to continue to provide accommodation while limiting the potential for an excessive flattening of the yield curve; and, since March 2020, the Reserve Bank of Australia has targeted the three-year yield, a target that is intended to reinforce the bank’s forward guidance for its policy rate and to influence funding rates across much of the Australian economy. The staff noted that these three experiences suggested that credible YCT policies can control government bond yields, pass through to private rates, and, in the absence of exit considerations, may not require large central bank purchases of government debt. But the staff also highlighted the potential for YCT policies to require the central bank to purchase very sizable amounts of government debt under certain circumstances—a potential that was realized in the U.S. experience in the 1940s—and the possibility that, under YCT policies, monetary policy goals might come in conflict with public debt management goals, which could pose risks to the independence of the central bank.”

In other words, the Federal Reserve wants to keep Treasury yields pretty low, and is exploring some of the ramifications of doing that. In previous meeting minutes, Fed officials discussed potentially capping yields across the entire duration spectrum of the Treasury market, which is what they did back in the 1940’s.

The Federal Reserve has a target of 2% annual inflation for the economy over time, meaning that prices on average as they measure them would go up by 2% per year if achieved. Another way of describing it is that the value of the dollar decreases compared to the cost of living by 2% per year based on their target rate, as more and more dollars are created.

When the Fed implemented yield curve caps in the 1940’s, it wasn’t a particularly fun time to be a holder of U.S. Treasury securities. Inflation levels fluctuated substantially over the period, sometimes briefly reaching double digit levels, while the Fed kept the 10-year rate pegged at 2.5% or below by using their balance sheet to buy Treasuries as needed. The result was that 10-year yields were on average lower than the inflation rate for the decade.

For example, anyone who invested $10,000 in Treasuries at the end of 1941 grew their money into $12,694 by the end of 1952, 11 years later. However, the average rate of inflation was high, and the inflation-adjusted purchasing power of that money would only be worth $6,754 in terms of “1941 dollars”. In other words, over 32% of the initial purchasing power was lost, as yields failed to keep up with broad price inflation.


Data Sources: Prof. Robert Shiller, Prof. Aswath Damodaran

With data going back to 1928, there were only two decades of deeply negative inflation-adjusted Treasury returns: the 1940’s and 1970’s. Other decades ranged from decent to great for Treasuries.

Unfortunately, some of the conditions for the 2020’s decade are shaping up to be potentially poor for Treasuries, including near-zero yields and the potential for yield curve caps. What’s challenging is the fact that if this is the case, it would likely be subtle. Treasuries will of course maintain their nominal dollar value, but the question is, will that growth rate average below the inflation rate for the decade?

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Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.