Why Add Private Lending to a Balanced Portfolio Amid Rising Rates?

Private lending should replace part of traditional bond allocations because floating-rate coupons, more stable valuations, and lower expected stock correlation can improve balanced-portfolio resilience when inflation and bond-market risks are elevated.

• Private lending typically invests in floating-rate notes whose quarterly coupons track short-term benchmarks near the Fed’s policy rate; a 0.25% Fed hike therefore increases coupon payments, while medium- and long-term fixed-rate bonds generally lose value.
• In 2022-2023, inflation reached approximately 7-9% and the Fed raised rates by 5.25 percentage points; private lending produced steady positive total returns while traditional bonds, leveraged loans, and high-yield bonds lagged.
• Stock-bond diversification weakened in 2021-2024, with particularly poor balanced-portfolio returns in 2022, whereas private lending generated stable positive returns during the period.
• The 1994 tightening cycle offers a precedent: the Fed raised rates by 3 percentage points, and balanced portfolios underperformed targets often by 6-8%, suggesting value in floating-rate assets with lower correlation and attractive credit spreads.
• Unlike the 1999-2000, 2004-2005, and 2015-2019 cycles, the current environment combines inflation pressure, elevated Treasury supply, weaker foreign support for Treasuries, federal-debt concerns, and persistent war-related supply disruptions.

Takeaway: The authors expect the current cycle to resemble the more difficult 1994 and 2022 environments and recommend reallocating part of a balanced portfolio to private lending, while acknowledging that fewer rate hikes and productivity gains from AI could alter the outcome.