How does this impact Stable Value Fund and Money Market Fund rates? Money Market Funds invest in the extreme short end of the yield curve. Legally, the weighted averaged maturity of the underlying Money Market Fund assets must be less than 60 days, with no assets having maturities longer than 13 months. Money Market Fund rates are heavily influenced by the change in Fed Funds Rates. As short-term rates rise with the expectations of a rate hike, Money Market Funds can reinvest their maturing assets at higher yields and generate more return. Since, on average, their assets turn over every two months, the lag time between rates increasing and higher Money Market Fund rates is very short. However, it is important to note that even with the anticipated rise in rates, Money Market Fund yields will remain low by historical standards. Additionally, the last time the Fed raised rates in 2018, Money Market Funds also moved to increase their fees as well, retaining some of the yield gains.
Stable Value Funds, on the other hand, invest in the intermediate part of the yield curve and use an insurance contract known as a “wrap” to provide the guaranteed crediting rate and principal protection. The normal yield curve is upward sloping. As a result, investing in longer term assets has inherent return advantages. However, this also means that the assets do not turnover as quickly and crediting rates react more slowly to yield changes. The Stable Value wrap takes into account the market values of the assets along with current yields to calculate the guaranteed crediting rate.
When yields rise, existing assets that were issued with a lower yield lose value, which is reflected in their market value. However, this reduced market value is offset by the higher yield and thus the crediting rate stays relatively stable. As assets mature and get reinvested at higher rates, the crediting rate will then rise. Thus, crediting rates for Stable Value Funds as a percentage of the current crediting rate will rise more slowly than Money Market Fund rates. However, even though the crediting rate will lag for Stable Value Funds, it’s unlikely that Money Market Funds will outperform Stable Value investments.
During times of market uncertainty, many investors might consider it prudent to protect a portion of their assets with Stable Value. Because Stable Value is an investment option in a DC plan with regular ongoing contributions, those contributions get invested at higher yields as rates rise, helping to mitigate the impact of the rate increases on the portfolio and the crediting rate. For DC plan participants, Stable Value provides full liquidity, principal protection, and a guaranteed interest rate.