Stable Value and Rising Interest Rates

Art by Linda Liu

Because stable value funds invest in intermediate-term bonds, and money market funds favor short-term bonds, the recent rise in short-term interest rates has been creating some challenges for stable value.

Experts say, however, this condition is cyclical and that stable value funds still hold great appeal for retirement plan sponsors and participants.

“The interest rate environment over the past 12 months has been very challenging for stable value funds,” says Jonathan Kreider, vice president of investment products at Great-West Financial. “One head wind has been the general flattening of the yield curve, which is cyclical.”

Another head wind, according to Kreider, is “more structural.” He says the long-running bull market in equities has left investors, in general, less focused on defensive funds and capital preservation.

“All bull markets come to an end,” he advises.

John Faustino, chief product and strategy officer at Fi360, agrees that while the increase in short-term interest rates can make stable value funds “a little bit less attractive” than money market funds, in his experience this is usually a short-lived phenomenon.

“It’s true that rising short-term interest rates could create yields in money market funds that exceed those of stable value funds,” Faustino says. “Over the past 50 to 60 years, there have been 10 times when the yield curve inverted, whereby three-month Treasury yields, more similar to money market durations, have been higher than five-year Treasurys, more similar to stable value durations.”

What is important to note, he says, is that when those inversions did occur, they persisted for only five to six months.