September 2023 / RETIREMENT INSIGHTS
What’s Next for Stable Value?
Stable value could benefit after the Fed stops hiking.
Key Insights
- With the Fed telegraphing a modest amount of future rate hikes, we believe it is closer to the end of its rate hiking cycle.
- Though U.S. money market fund yields currently exceed stable value crediting rates, that relationship may begin to normalize as crediting rates move higher.
- Many plan consultants have stayed the course as crediting rates catch up with money market yields and market-to-book ratios move closer to par.
Over its nearly 50-year history, stable value has served as a relatively less volatile option for older U.S. retirement investors looking for stability while potentially providing attractive income. Moreover, given its longer duration, U.S. stable value has historically offered a yield premium over money market funds, even in periods where the U.S. Federal Reserve was hiking rates. When comparing the performance of the Morningstar US CIT Stable Value Index with the Lipper Money Market Index on a rolling monthly basis, stable value has provided, on average, 168 basis points of excess return relative to money funds over the past 20 years.
Stable Value Has Offered Advantages Over Its History
And while there have been periods of disintermediation, where the Fed was tightening monetary policy or hiking rates and money fund yields exceeded stable value crediting rates, these periods were brief and were quickly followed by periods of easy monetary policies. This hiking cycle has been different as the Fed has tightened rates quicker and more aggressively to control inflation, and stable value excess returns relative to money market funds turned negative for the first time in nearly 20 years. Looking at Figure 1, the Morningstar US CIT Stable Value Index has still outperformed the Lipper Money Market Index in 98% of monthly periods rolling annually up through the most recent quarter-end.
Stable Value Offers Yield Premium
(Fig.1) Stable value has looked attractive until recently
As of June 30, 2023.
Past performance is not a reliable indicator of future performance.
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.
Source for Lipper data: Lipper Inc. Please see Additional Disclosures for information about this Lipper information. Source for Morningstar index data: Please see Additional Disclosures for information about this Morningstar information. The above represents one-year rolling monthly excess total returns of the Morningstar US CIT Stable Value Index versus the Lipper Money Market Index. 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.
What’s Next for Stable Value?
Over the past 20 years, stable value has weathered two financial crises and multiple 0% interest rate environments remarkably well. The industry now faces rapidly rising interest rates, higher inflation, and weaker participant cash flows—presenting a host of new challenges ranging from weaker market-to-book value ratios and extended periods of disintermediation from money market funds.
As highlighted in Figure 2, while we have experienced past periods of disintermediation in prior rate hiking cycles, this period has been deeper and prolonged.
Historical Crediting Rates and Money Market Fund Yields
(Fig.2) Stable value maintained competitive yields over time
As of June 30, 2023.
Past performance is not a reliable indicator of future performance.
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.
1 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. Please see Additional Disclosures for information about this Morningstar information.
Source for Bloomberg index data: Bloomberg Index Services Limited. Please see Additional Disclosures for information about this Bloomberg information.
Source for Lipper data: Lipper Inc. Please see Additional Disclosures for information about this Lipper information.
While stable value faces many challenges, the asset class continues to be on firm footing and should benefit from expanding wrap capacity and higher reinvestment rates, which ultimately supports higher crediting rates and improving market-to-book value ratios. Many U.S. consultants and advisors have chosen to stay the course with stable value over money market funds even as the Fed committed to tightening monetary policy.
In the current environment where reinvestment rates exceed crediting rates, we would expect crediting rates to continue to move higher while money market fund yields peak with Fed fund rates. Eventually, crediting rates should catch and surpass money market fund yields, but it will take some time. That said, we believe this increase in stable value crediting rates could be accelerated once the Fed starts easing monetary policy.
Higher Rates Present Both Challenges and Opportunities for Stable Value
Higher interest rates present unique investment opportunities within the stable value asset class. While many advisors have chosen to remain in stable value over money market funds, some advisors have chosen to hold off on planned money market fund conversions in the face of rapidly rising rates. As such, we expect to see an uptick in U.S. money market fund conversions to stable value in the coming 12 months as advisors look to take advantage of potentially higher yields and more competitive stable value crediting rates.
In addition to money market fund conversions, we are also seeing an uptick in general account transitions, where plans are moving out of insurance general account and separate account products into stable value. We believe longer durations, weaker market-to-book value ratios, and crediting rates, along with onerous exit provisions and recent merger and acquisition activity, are driving some of this increased activity out of insurance products.
Conclusion
Even though stable value has struggled to keep pace with money market funds in this extraordinary period of rapidly rising rates, the asset class has held up well in the face of multiple headwinds. Moreover, wrap fees remain steady and wrap capacity continues to be robust and available as wrap providers remain open to deposits. Last, while higher rates present challenges, higher stable value reinvestment rates also present unique opportunities for money fund conversions and general account transitions to stable value separate accounts.
Additional Disclosure
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
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 T. Price Stable Value Products or any member of the public regarding the advisability of investing in stable value generally or in 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 MORNINGSTAR US CIT STABLE VALUE INDEX OR ANY DATA INCLUDED THEREIN AND MORNINGSTAR ENTITIES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
Portions of the information contained in this paper 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.
“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 this product. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to this product.
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.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.
© 2023 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.
October 2023 / RETIREMENT INSIGHTS
Antonio “Tony” Luna is a portfolio manager and head of the Stable Asset Management team in the Fixed Income Division. He specializes in managing stable value and synthetic investment contract portfolios, and he co-manages the Stable Value Common Trust Fund. Tony is a member of the Low Duration Investment, Stable Value Advisory, Synthetic Investment Contract, and Fixed Income Steering Committees, and he currently serves on the Executive Board of the Stable Value Investment Association. He also is a vice president of T. Rowe Price Group, Inc., T. Rowe Price Associates, Inc., and T. Rowe Price Trust Company.
Xin Zhou is a portfolio manager of the Stable Value Intermediate strategies in the Fixed Income Division. She co-manages the separate account portfolios and the Stable Value Common Trust Fund. Xin is a member of the Low Duration Investment, Stable Value Advisory, and Synthetic Investment Contract Committees. She also is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price Associates, Inc.
Ben Gugliotta is a portfolio manager specializing in stable value portfolios in the Fixed Income Division. Ben is a member of the Low Duration Investment, Stable Value Advisory, and Synthetic Investment Contract Committees. He is a vice president of T. Rowe Price Group, Inc., T. Rowe Price Associates, Inc., and T. Rowe Price Trust Company.
Whitney Reid is a portfolio specialist in the Fixed Income Division. He supports the Stable Value, Money Market, US Ultra Short-Term Bond, and US Short-Term Bond Strategies and acts as a proxy for fixed income portfolio managers with clients, consultants, and prospects. Whitney is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price Associates, Inc.
