US Treasury yields have been on a rollercoaster this year. But we expect the appeal of borrowing strategies to rise as the global rate-cutting cycle continues. Borrowing can form part of a financial plan, subject to awareness of its risks.
• Major government bond yields rose in early 2025 on a hawkish December Fed meeting and the anticipation of US tariffs.
• US yields have been buffeted by softer US GDP data for the fourth quarter, tech sector volatility pushing them down, and a hawkish January jobs report and above- expectation inflation data pushing them up.
• We expect major central banks to ease further, with falling yields in 2025 set to boost the appeal of borrowing.
• 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.
• 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.
The ECB last week cut rates for the sixth time since it started its easing cycle in June, taking its benchmark rate to 2.5%. President Christine Lagarde did note that “monetary is becoming meaningfully less restrictive”, causing markets to scale back expectations for the extent of further reductions. But we still expect two 25 basis point cuts in the remainder of 2025.
Subject to careful planning and risk management, borrowing may help manage liquidity, improve portfolio diversification, help navigate currency swings, and boost return potential in the year ahead.
• 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).
We believe a falling-rate environment in 2025 may be one where proactive borrowing approaches, with judicious use of debt as a tool for achieving financial goals, is worthy of investors’ attention. By leveraging debt wisely, investors have the potential to enhance portfolios, manage risks, and improve the likelihood of achieving long-term financial goals.
