Stable Value Rate Declines, Standards Remain High

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.