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Tracking Stable Value Yield Spreads

BInterest rates moved modestly higher in the third quarter as market participants continued to fret over concerns of stronger economic growth, the prospects for inflation and the direction of Federal Reserve monetary policy. The Federal Reserve has moved to tighten monetary policy and continues a bias towards raising short-term interest rates to cool economic activity and pre-empt inflationary pressures. As such, longer term interest rates have risen in a fairly dramatic fashion this year, over 1.25 percentage points, which is the second highest rate of increase ever in interest rates in a yearly period. (1994 still holds the record) Further plaguing bond in investors this year has been continued widening of risk premiums, especially in the corporate sector. This phenomena began over one year ago in reaction to liquidity concerns in the market tied the hedge fund related financial crisis. Adding to the record widening of risk premiums last fall has been a surge of corporate issuance in the last several months combined with a decreasing appetite for holding inventories of bonds by Wall Street. This supply/demand squeeze has pressured risk premiums in a market already experiencing liquidity concerns.

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