Stable Value Rate Declines, Standards Remain
High
With the increased volatility experienced in 2008 in both the
equity and fixed income markets, the yield of conservative investments such as
treasury bills, money market funds, and other short-term investments have fallen
as investors have sought “safe haven” investments. For example, at one point
during the fourth quarter, the annualized yield of the 2-year U.S. Treasury note
was less than 1 percent, and money market fund yields dropped close to 1
percent.
The Program’s most conservative investment option is the Stable Value Option (SVO),
which is a stable value fund. The SVO is structured to be a prudent
income-producing, liquid fund with AA+ average credit quality. The SVO is
managed according to the Board’s investment policy, is diversified over six
investment managers, and has an assurance of financial protection provided by
wrapper contracts issued by multiple financially responsible banks and insurance
companies to improve stability.
The SVO crediting rate for the first quarter will be 4.10%. Stable value funds
tend to track the general movement of interest rates, although with a lag. With
the Federal Reserve cutting the overnight Federal Funds rate and the otherwise
general decline in yields of conservative investments, we expect the yield of
the SVO to trend lower over time, yet still provide stability of principal,
daily liquidity, and a reasonably attractive rate of return.