Investment radar: Seize the rate-cut opportunity, private credit and beyond
Are you ready for the Federal Reserve's next move?
With rate cuts widely expected in September 2025, investors are closely watching as they can affect yields and position for growth. Weaker July nonfarm payrolls data and growing labour market concerns were among the key factors shaping the expectations for an ease cycle.1
Key data from CME’s FedWatch Tool (as of August 12, 2025) shows an 84.5% probability of a 25-bps rate cut in September 2025, and a 52% chance of another in October (Figure 1). J.P. Morgan analysts predict four consecutive cuts, potentially dropping rates to 3.25–3.50% by year-end.2
With easing expected to occur, investors may consider positioning ahead of potential interest rate cuts.
In this article, we explore how rate cuts reshape the investment landscape, with a spotlight on private credit, where yields remain attractive amid falling benchmarks.
How do easing cycles tend to shape the investment landscape?
Rate cuts work their magic through several key channels: lowering the discount rate on future cash flows (boosting valuations), easing borrowing costs for companies, and sparking risk appetite for higher-growth assets. Here's a breakdown by asset class, with real-world implications for private market investors:
- Public equities: Early easing often fuels rallies, especially in growth sectors like tech and healthcare. Valuations expand as investors chase long-duration earnings. For example, the S&P 500 has gained an average of 9.1% in the six months following the first rate cut across 11 cycles since 1982.3
- Public fixed income: Bond prices rise as yields fall. Investors flock to longer-duration bonds to secure today's rates before they drop. However, reinvestment risk is a concern, as new bonds will yield less.
- Private credit: This is where nuance shines. Floating-rate loans may reset lower, but overall credit risk improves as borrowers' debt burdens are at ease. The illiquidity premium (extra return for less liquid investments) stays compelling, especially in senior-secured or asset-backed deals. Yields of 8–10% in direct lending strategies for example, could persist on existing portfolios, making private credit a potential defensive play with upside.4
- Real assets (e.g., Real estate and infrastructure): Financing costs drop, compressing cap rates (leading to higher property values). 5 Gains often lag the policy change, but sectors like data centers or renewables could accelerate due to tech demand.
- Venture and growth equity: Lower capital costs revive fundraising and boost exit multiples (e.g., IPO valuations). Startups in AI or biotech may see faster paths to liquidity.
Overall, easing cycles reward proactive positioning. Private markets, with their longer horizons, can capture premiums unavailable in public assets (think stable cash flows from credit or inflation-hedged returns from infrastructure).
How private market investors could position their portfolios in such a rate-cut environment
Rather than siloing portfolios by asset class, investors are expected to view their holdings through interconnected lenses that align with their goals. As rates fall, focus on strategies that balance yield preservation with growth potential:
- Yield lock-in vs. Reinvestment risk: Secure enhanced yield deals now. As benchmark rates fall, the yield on new private credit originations typically declines. Portfolios with existing higher-rate deals may maintain their income profile for a period, while new commitments adjust to the lower-rate environment.
- Duration of capital commitments: The length of time capital is tied up becomes a more visible factor when the cost of capital is falling. In past cycles, investors with staggered commitment schedules have participated in different points of the valuation and financing cycle. Shorter-duration funds (3–5 years) let you pivot quickly, while longer ones (7–10 years) capture valuation uplifts in real assets.
- Capital cost sensitivity: Prioritise leverage-sensitive strategies. Certain private equity and infrastructure strategies show a stronger performance shift when financing becomes cheaper. Assessing a strategy’s sensitivity to leverage costs can be part of the allocation review.
- Liquidity optionality: Keep flexibility for surprises. Even during easing phases, pockets of market stress can appear. Maintaining some allocation flexibility, such as through shorter-duration or secondary-market vehicles, has historically allowed investors to engage with time-sensitive opportunities.
- Sector resilience: The broader rate environment interacts with sector-specific fundamentals. For example, sectors driven by long-term demographic or technological trends may be less affected by short-term rate movements than those dependent on cyclical credit expansion.
By applying this framework, investors can build their portfolios to their risk tolerance and timeline. For instance, a conservative portfolio typically allocates a higher proportion to private credit due to its historically lower volatility and relatively stable yield profile. Growth-oriented portfolios with longer investment horizons often include venture capital exposure, which has demonstrated higher return potential over extended periods, albeit with increased risk. Ultimately, aligning allocations with individual goals and constraints helps optimise risk-adjusted returns and enhance portfolio resilience.
References:
1https://www.reuters.com/world/china/dollar-edges-up-with-us-inflation-report-tap -2025-08-11/
2https://www.reuters.com/business/jpmorgan-brings-forward-fed-rate-cut-forecast-september-2025-08-08/
3https://www.investors.com/news/sp-500-record-high-fed-rate-cut-history-easing-cycles/
4https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/why-private-credit-remains-a-strong-opportunity
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