Dale, a 56-year-old Army civilian, opened his TSP statement in the spring of 2022 and had to read the F Fund line twice. He had moved a chunk of his balance out of the C Fund the previous fall, nervous about the market and wanting something steadier. Now the "steady" fund was down more than the stock fund he'd fled, at least for that quarter. He called a colleague. The colleague said, "I thought bonds were the safe part."

They are, mostly. But "safe" covers different things, and the F Fund shows the difference better than any other TSP fund.

What the F Fund actually holds

The F Fund tracks the Bloomberg U.S. Aggregate Bond Index. That means a broad mix of investment-grade bonds: Treasuries, government agency debt, mortgage-backed securities, and corporate bonds. No junk bonds, no foreign debt to speak of. Credit risk is low. Default is rarely the worry here.

Interest rate risk is the worry. The index has an average duration of around six years, though the exact number drifts, so check the current fact sheet at tsp.gov.

Duration in plain terms

Duration is a rough measure of how much a bond's price moves when rates move. A rule of thumb: for every one percentage point rise in interest rates, the price falls about one percent per year of duration. With six years of duration, a one-point jump in rates means roughly a 6 percent price drop.

That is the arithmetic of 2022. The Federal Reserve raised its policy rate from near zero to above 4 percent in about nine months, and longer-term rates climbed too. The F Fund lost about 13 percent for the year. Check tsp.gov for the exact figure. It was the worst year for broad U.S. bonds in the modern record, and it landed on people who thought they were buying calm.

The part most people miss: yield works in your favor

Here is the other half of the story, and it is the half that gets lost when the statement shows red.

When rates rise, the bonds already in the fund lose value. But as those bonds mature or get replaced, the fund buys new ones paying higher rates. The income stream improves. Over time, that higher income offsets the price loss.

A simple example. Say you hold $100,000 in a fund with a six-year duration and a 3 percent yield. Rates jump one point overnight. The price falls about 6 percent, so you're at $94,000. But the fund now yields about 4 percent on its new holdings. Hold for roughly six years, the duration, and the extra income approximately makes up the hit. After that, you're ahead of where you would have been if rates had never moved.

That break-even horizon is the thing to remember. A fund with a six-year duration asks for roughly a six-year commitment if you want to be made whole after a rate shock. It is a rule of thumb, not a promise. Real rates move gradually, not in one jump, and the math gets messier.

Who gets hurt, and who doesn't

The F Fund punishes a particular kind of investor: someone who needs the money soon, or who bails out after the drop.

Dale, as it happened, was 9 years from retirement. His time horizon was longer than the fund's duration. If he had held on, the recovery math worked for him. If he had sold in a panic at the bottom, he would have locked in the loss and missed the higher yields that followed.

Compare that to a 66-year-old who needs to draw $2,000 a month starting next year. If a big slice of her money sits in the F Fund when rates spike, she might be selling shares at a depressed price to cover living expenses. That is sequence risk, and it is the real danger for people near or in retirement.

F Fund versus G Fund

The G Fund is the natural comparison. It invests in special-issue Treasury securities, never loses principal, and its rate follows market yields on longer-term Treasuries. When rates rise, the G Fund's rate follows. You get the upside of higher rates without the price drop.

The tradeoff is that G Fund returns have historically been lower than F Fund returns in long stretches of falling rates, and the G Fund can't capture the price gains when rates fall. Many people hold both for that reason. The G Fund anchors the money you'll need soon. The F Fund is for the money with a longer runway that you want diversified away from stocks.

One caution: in 2022, the F Fund didn't diversify well. Stocks and bonds fell together, which is unusual. It doesn't happen often, but it can happen, especially when inflation is the driver.

If you hold bonds in an IRA

The same logic applies outside the TSP, with more options. Short-term bond funds have lower duration and swing less. Treasury bills and CDs let you lock in higher yields for a fixed term. Individual Treasury bonds held to maturity pay you back face value regardless of what the price did in between. A ladder of bonds maturing in staggered years gives you cash coming due on a schedule. Treasury Inflation-Protected Securities, or TIPS, adjust principal for inflation.

None of these is automatically better than a broad bond index fund. They fit different needs. Contribution limits and tax rules for IRAs shift yearly, so check irs.gov for current figures.

A practical way to think about it

Before you move money in or out of the F Fund because of what rates are doing, ask three questions.

  • When do I need this money? If it's within about three to five years, the F Fund's price swings can matter. If it's longer, the recovery math is on your side.
  • What job is this money doing? Income, stability, or diversification from stocks? The F Fund does the third job better than the second.
  • Would I stick with it through a bad year? A fund you abandon at the bottom is a worse fund for you than a lower-returning one you hold.

Trying to time rate moves is a poor bet. Professionals with entire research departments get it wrong regularly. A better approach is to set an allocation that fits your timeline, rebalance on a schedule, and accept that bonds can have a bad year without being broken.

Dale, for what it's worth, left his money where it was. By the time he retired, the F Fund was yielding far more than when he had bought in. He wasn't thrilled about 2022. He did stop calling it "the safe fund." He calls it "the one that pays me to wait."

Check the current duration, yield, and returns for all TSP funds at tsp.gov before you make changes. Your own timeline matters more than any headline about the Fed.