The global easing cycle from central banks has continued, raising the appeal of borrowing strategies.
- Weaker-than-expected US labor market data for August reinforced expectations of imminent Federal Reserve rate cuts, starting at this week's policy meeting.
- Switzerland has already reduced rates to zero over the course of 2025.
- 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
New data showed the US economy generated around 911,000 fewer jobs than estimated in the year to March, while producer prices unexpectedly fell 0.1% in August. US core consumer prices rose 0.3% in August, in line with consensus estimates. While inflation remains above levels that are consistent with the Fed hitting its 2% annual inflation target, top central bank officials have been signaling that rate cuts are on the way amid mounting evidence of a weakening jobs market.
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¡ªthe 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.
