T. Rowe on Stable Value vs. MMFs
T. Rowe Price published an article called, "Resetting expectations: Why stable value makes sense in today's dynamic markets," which tells us, "The debate between stable value portfolios and money market funds has reignited, as defined contribution (DC) consultants expect increased plan sponsor interest in reviewing/revisiting their plans' capital preservation investment options. This is largely driven by today's interest rate environment, in which money market fund yields have outpaced stable value crediting rates over the past three years -- a dynamic rarely seen over the past three decades. As the interest rate cycle enters a more uncertain phase, we believe now is the time for plan sponsors to consider stable value and its place as a long term capital preservation strategy in a plan lineup." The brief continues, "With increased uncertainty over the path of interest rates going forward, plan sponsors should reexamine the trade‑offs between capital preservation options. Money market funds and stable value strategies both play important roles in DC plan lineups, and many plans offer both options to participants. However, the two have historically behaved differently throughout changes in the interest rate cycle." It adds, "The key difference is how fast yields respond to changes in interest rates. Historically, when rates rose, money market funds benefited because their yields can increase in a short period of time. They tend to respond almost immediately to changes in the federal funds rate because they must invest in very short‑term securities that mature and reset frequently. That same dynamic can be a detriment for money markets in a falling rate or low rate environment as money market yields reprice lower. Stable value typically reacts more slowly because portfolios are longer duration, and wrap contracts are intended to help reduce day‑to‑day volatility and smooth changes in the interest rate investors earn. Crediting‑rate resets are heavily influenced by portfolio yields, market‑to‑book relationships, and participant cash flows."
