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Tracking Stable Value Yield Spreads: Interest Rate Commentary - 06/30/99

Interest rates continued to rise in the second quarter as ongoing strength in the U.S. economy prompted fears of renewed inflation pressures and expectations of tighter monetary policy. The Federal Reserve did move in late June to tighten monetary policy a notch through a one quarter percent (25 basis points) increase in the Federal Funds rate, but they gave no indications as to further tightening moves.

Interest rates have seemingly stabilized around the 6.0% level on the 30 year U.S. Treasury bond, which represents about a 1.0% rise in rates thus far in 1999. As a result, most fixed income portfolios have experienced negative year-to-date returns when market price declines are factored in. Positively, however, risk premiums in certain of the non-U.S. Treasury sectors have narrowed somewhat, providing better relative returns for portfolios more heavily weighted in lower quality corporates and mortgage securities. Five year GIC spreads averaged around 90 basis points during the second quarter, but have widened subsequently to average about110 basis points in July. (The GIC spreads are calculated using the weekly average of the top ten spreads provided by the GIC issuers).

Tracking Stable Value Yield Spreads Graph:

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