February 2023 / STABLE VALUE
Impact of Rising Rates on Stable Value
Long-term opportunities remain despite headwinds.
Key Insights
- Stable value has a long history of strong performance relative to money market funds.
- Infrequent, brief periods of moderate disintermediation, where money market funds outyield stable value funds, are nothing new, and the current period should revert to the historical normalcy over time.
- While higher rates lead to lower market-to-book value ratios, they also lead to higher reinvestment yields and more attractive crediting rates.
For investors looking for an investment option seeking principal preservation, stable value can offer shelter from market volatility while potentially providing stable income. Moreover, given its relatively longer duration and broader range of investments, stable value has historically offered a yield premium over money market funds, even in periods where the Federal Reserve (Fed) was hiking rates and yield curves were flattening. As highlighted in the following chart (Fig. 1), on a rolling monthly basis, stable value has provided, on average, 1.80% of excess return relative to money funds over the past 20 years. And while there were periods of disintermediation, where the Fed was tightening monetary policy and money fund yields exceeded stable value crediting rates, these periods were brief and were quickly followed by periods of easy monetary policies.
Stable Value Offers Yield Premium
(Fig. 1) Historically, stable value has provided a steady yield advantage over money markets
As of December 31, 2022.
Past performance is not a reliable indicator of future performance.
Sources: Lipper and Morningstar. Please see Additional Disclosures for more information.
The above represents one-year rolling monthly excess returns of the Morningstar US CIT Stable Value Index versus the Lipper Money Market Index. Money market funds and stable value products have different risks, including the possible loss of principal. It is important that you carefully review the legal documents for each type of vehicle to determine if it is appropriate for you prior to investment.
Figures are calculated using monthly data and are gross of fees. Returns would have been lower as the result of the deduction of applicable fees.
While we are currently in a period of disintermediation, we believe that stable value continues to be on firm footing with ample wrap capacity and solid relative long-term performance. That said, higher rates have led to weaker market-to-book value ratios, but more attractive reinvestment rates and rising crediting rates could be advantageous for stable value investors in the longer term. For reference, crediting rates are the book value yield that a stable value participant receives, and reinvestment rates represent the market value yield on the underlying fixed income portfolio in a stable value fund.
We Have Been Here Before
Over the past 30 years, stable value has typically provided a safe harbor with competitive yield for investors throughout two financial crises, in addition to two 0% interest rate environments. While each financial crisis had unique volatility, credit, and liquidity challenges, rising interest rates provoke a host of new challenges ranging from weaker market‑to-book value ratios and an uncertain period of disintermediation from money market funds.
However, infrequent periods of disintermediation are not new, as highlighted in Figure 2. Looking back at most periods of disintermediation, the amount was shallow, and the period of disintermediation was brief. The yield dynamics between money markets and stable value quickly reversed after the Fed started cutting rates to start supporting the economy.
Rising Rates Present Both Challenges and Opportunities for Stable Value
As noted above, stable value has weathered periods of disintermediation before. However, we remain mindful that each market environment is unique. How the current environment differs from previous monetary tightening cycles is the extraordinary speed of rate hikes deployed by the Fed as it confronts stubborn inflation persisting at the highest level since 1980s. In response to the Fed’s aggressive policy actions, shorter-term rates have taken the brunt of the impact with the three‑month Treasury yield surging rapidly by more than 400 basis points over the course of 2022. As a result, the 2-/10-year portion of the yield curve has remained inverted.
Historical Crediting Rates and Money Fund Yields
(Fig. 2) Stable value maintained competitive yields over time
Data range September 30, 2000–December 31, 2022.
Past performance is not a reliable indicator of future performance.
Sources: Bloomberg, Lipper, and Morningstar. Please see Additional Disclosures for more information.
Money market funds and stable value products have different risks, including the possible loss of principal. It is important that you carefully review the legal documents for each type of vehicle to determine if it is appropriate for you prior to investment.
*Universe rates of return are reported gross of management fees.
Data provided on this page include the historical information of the Hueler Pooled Fund Index through December 31, 2020, and the Morningstar US CIT Stable Value Index from January 31, 2021, to the current period ending date.
On the other hand, rising rates may present an opportunity for plan sponsors who might be looking to convert a money market fund into stable value. As shown in Figure 2, the reinvestment yield for stable value as represented by the Bloomberg U.S. Intermediate Government/Credit Bond Index remains higher than the money market yield as represented by the Lipper Money Market Index. As long as the reinvestment yield for a new stable value investment exceeds the yield of the money market fund, participants should see an immediate benefit from a conversion.
Conclusion
Each market environment is different, and this market with rising interest rates, higher inflation, and weaker market‑to‑book value ratios has its own unique challenges and opportunities. With a long history of strong performance, ample wrap capacity in the market, and higher reinvestment rates, stable value should remain an important investment option for participants looking for principal preservation and a competitive rate of income.
Additional Disclosures
Data provided on this material includes the historical information of the Hueler Pooled Fund Index through December 31, 2020, and the Morningstar US CIT Stable Value Index from January 31, 2021, to the current period ending date. The Morningstar US CIT Stable Value Index (Universe), formerly the Hueler Analytics Stable Value Pooled Fund Index, is provided by Morningstar, Inc., a financial services firm, and provides an array of investment research and investment management services. The Morningstar US CIT Stable Value Index is an equal-weighted total return average across all participating funds in the Universe and represents approximately 75% of the stable value pooled funds available to the marketplace.
Note: Bloomberg® and the Bloomberg U.S. Intermediate Government/Credit Bond Index are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by T. Rowe Price. Bloomberg is not affiliated with T. Rowe Price, and Bloomberg does not approve, endorse, review, or recommend its products. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to its products.
Note: Portions of the mutual fund information contained in this report was supplied by Lipper, a Refinitiv Company, subject to the following: Copyright 2023 © Refinitiv. All rights reserved. Any copying, republication or redistribution of Lipper content is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.
Note: T. Rowe Price Stable Value products are not sponsored, endorsed, sold or promoted by Morningstar, Inc. or any of its affiliates (all such entities, collectively, “Morningstar Entities”). The Morningstar Entities make no representation or warranty, express or implied, to the owners of the T. Rowe Price Stable Value products or any member of the public regarding the advisability of investing in stable value products against which the Product is being benchmarked generally or in the T. Rowe Price Stable Value products in particular or the ability of the Morningstar US CIT Stable Value Index to track general stable value market performance.
THE MORNINGSTAR ENTITIES DO NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE US CIT STABLE VALUE INDEX OR ANY DATA INCLUDED THEREIN AND MORNINGSTAR ENTITIES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
IMPORTANT INFORMATION
This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
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February 2023 / VIDEO
