A Maximum of One Year of Interest Lost

A reader asked if I had an update to my piece Unstable Value Funds? Yes, I do.

Have we survived the demise of Fannie and Freddie, Ambac and MBIA? It seems that way, but I would not be certain. These credits were crammed into stable value funds. How do you feel about life insurers? The stock prices of those that issue GICs have fallen significantly. Credit spreads have widened significantly.

Should you worry here?  My view is yes.  Any significant negative impact on the GSEs, Financial Guarantors or Life Insurers could affect the solvency of stable value funds to the tune of one year’s worth of interest.

This is similar to the way that I view money market funds.  It is possible that they could lose a year’s worth of interest.  Beyond that, I don’t see likely losses, unless the stable value fund had an unusual investment policy.