Club Fed Cashes In: Special Favors for Federal Employees

We blogged last January on special interest rates for federal employees and retirees.   We said,

How would you like to have had a money market account in the zero interest rate environment of the last few years that paid better than 2 percent? How would you like to buy bonds that will adjust to higher interest rates with no decrease in principal value? If you are an ordinary person, saving and investing, planning to buy house, hoping to fund a college education or contemplating retirement, you don’t have these options because you are not a federal employee. You can stash your money in an interest bearing account that pays 0.01 percent. Or you can package a bundle of long term treasury bonds that yields 2-plus percent, but the package will lose value, and result likely in an overall net loss when the Federal Reserve Board reverts to standard monetary policy with higher interest rates a year or two down the road. 

The federal employee option that you don’t have is referred to as the G Fund in the Thrift Savings Plan (TSP).

The reversion has started. Driven by the Federal Reserve's aggressive money printing programs, referred to as QE's I, II and III, the yield (interest rate) on a ten-year treasury note bottomed at 1.62 percent on May 2nd. Ben Bernanke, Chairman of the Federal Reserve has since signalled that the Fed is contemplating a slow down and eventual shut down of QE III over the next year and one-half. The market has reacted. As of today's market close the 10-year yield had risen to 2.55 percent.

Ten year Treasury notes, yield history, 5/2/13 through 6/24/13

Similarly affected, over the same period the yield on 30 year treasury bonds has risen from 2.83 percent to 3.56 percent.

Thirty year Treasury bonds, yield history, 5/2/13 through 6/24/13

The price (or the value if you already own it) of treasury debt went the other way. Ten year note prices dropped from 133.67 to 126.13, a decline of 6.6 percent. Thirty year bond prices have dropped from 149.30 to 135.07, a decline of 9.5 percent. 

So someone who actually holds treasury bonds, which you most likely do as an average investor who has a bond fund or funds as part of your investment or 401(k) portfolio, has taken a big valuation hit. Not so us members of Club Fed. Your long-term government bond values have dropped, probably between 7 and 8 percent, which will be reflected in your monthly statements. Not me. You might as well have written me a check for $35,000, because as a member of Club Fed I have had the special privilege of ducking the market impact of the bond revaluation, while immediately earning the increased long-term interest rates. I, along with my federal employee and retiree brethren, we are special -- we are members of Club Fed.   Over a decade the cost of this Club Fed benefit is a $70 billion federal budget deficit hit. It's not just for the IRS. Party on federal employees, party on.