Bonds and Treasuries

[jdee]

Tom,

I’m a new member to your forum and have a couple of questions. Several years ago, I read a short blurb in a FedWeek retirement newsletter that stated that federal employees investing in the TSP really did not need to invest in bonds/bond mutual funds in order to reduce investment risks. I wrote FedWeek two or three times in an effort to get more and in-depth information, but got no response. It appeared to be a logical idea and sound advice, at the time. Now that TSP accounts are never more than 24-48 hours from a “commission free” transfer to the safety of the G-Fund, that FedWeek article makes a whole lot of sense to me. The possible exception might be if you wanted to invest more in bonds/bond funds than your TSP contributions allow. I’d like your opinion on that, please. The second thing that I’d like your opinion on is another article that I read just a couple of weeks ago. It stated that after the Fed stops raising interest rates, historically, it starts to lower rates around 5 ½ months later. To me, that signals that TSP investors should anticipate a gradual, but significant, rise in the F Fund, and either start F Fund contributions or be on alert to transfer funds there. What do you think?

[tsptalk]

Welcome jdee! To take your 2nd question first, the Fed raised rates through June of this year (2006) and the bond market has been on fire since, bottoming almost to the day. No delay this time.

In your 1st question, conventional wisdom has it that the bond market will do well when rates are lowered but the Fed lowers rates when the economy is slowing, thus lower corporate earnings, lower shares prices. That's conventional. The stock market knows that when rates start to fall it means good news for stocks down the road when the lower rates take effect on the economy. That's why the market seems to move before news is released.

So, in my less than expert opinion, bonds are a good part of a diversified account, but like the market, I only use them when the they appear oversold and I am looking for a safe haven from stocks. Otherwise I use the G fund.

Thanks for joining us!
Tom