How long will 401(k) "stable value funds" remain stable?

My company has reassuring words regarding our SVF. I don't know how meaningful that is. However, it raises the question of what else to do?

The plan has two choices for "fixed income", the SVF or a Lehman Aggregate Index bond fund. That fund was flat a good bit of last year, then rallied late to actually outperform the SVF (although only by about 0.5%).

I'm not an expert on such funds, so I don't know which is better. I've been splitting between the two. I've heard some pundits say that should the current low interest rate environment give way to significantly higher rates the bond funds will get hammered.

Brian

Two things, mainly, will affect whether the bonds get "hammered" or not. One, overall rates - if they go up, then the longer the maturity (and duration) of the bonds, the more those bonds go down. And two - credit spreads - this past year, treasury bonds rates have gone way down as folks have "flown to safety", but at the same time, spreads widened up - the difference between rates on corporates (and pretty much everything else) versus treasuries has gotten huge.

So the effect on (general) bond prices when treasury rates rise may be huge if spreads stay the same or widen. But given the extraordinarily wide spreads right now, it's quite possible that spreads will tighten up some as treasuries rates rise, which will moderate the effect.

The Lehman Aggregate is composed currently of about 25% US Treasuries. The rest is made up of mortgages, bonds of agencies (ie. Fannie bonds themselves rather than mortgage-backed bonds issued by Fannie), and about 20% corporates. If rates go up and spreads tighten, while everything in the Agg gets hurt by rates going up, the majority of the Agg will be helped by that tightening, so it won't necessarily be hurt as badly as pure treasuries.