The global easing cycle from central banks has continued, raising the appeal of borrowing strategies.
- Weaker-than-expected US labor market data for August led the Federal Reserve to cut rates by 25bps in September, with projections for a further 50bps of rate cuts by the end of this year.
- The Swiss National Bank has already bought its policy rate down to zero and kept policy on hold at last week's meeting.
- The Bank of England cut its policy rate by 25 basis points to 4% in August.
Against this backdrop, prudent borrowing can play multiple roles that support financial goals.
- It may provide immediate funds without selling assets, avoiding taxable gains and transaction costs.
- Investors looking to fund new private market investments may find it more efficient to borrow against diversified bond portfolios rather than hold excess cash to meet capital calls.
- Borrowing to invest can yield higher long-term returns if expected returns exceed borrowing costs.
With the right risk management, borrowing strategies may grow in appeal this year.
- Borrowing comes with risks that investors must be willing and able to bear. Investors should compare loan interest rates with expected returns; if returns are lower, borrowing may not be viable.
- A borrowing strategy's robustness must be assessed against market risks and spending plans. Key factors in choosing a borrowing strategy include loan duration, refinancing potential, and interest rate expectations.
New this week
Federal Reserve Chair Jerome Powell emphasized last week that there is no “risk-free path” for US monetary policy, highlighting the challenge of balancing inflation with a softening labor market. Meanwhile, the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, for August remained above the central bank's 2% target.
Did you know?
- Two of the 12 voting members of the Fed's policy-setting committee dissented in favor of a rate cut at July's meeting—the first time since 1993 the committee has seen multiple dissents.
- Historical analysis, while no guarantee of future performance, suggests borrowing to invest in diversified portfolios may bear fruit. CIO analysis of 24-month rolling returns for a 60/40 portfolio of US stocks (S&P 500) and US government bonds between 1998 and August 2024 finds such a portfolio would have generated returns ahead of US dollar borrowing costs on nearly 75% of occasions (and by an average 3.4% each year).
Investment view
We believe a falling-rate environment in 2025 may accommodate proactive borrowing approaches, with judicious use of debt as a tool for achieving financial goals. By leveraging debt wisely, investors have the potential to enhance portfolios, manage risks, and improve the likelihood of achieving long-term financial goals.
