Today’s higher bank interest rates and more attractive investment yields are helping to widen the spread between the cost to borrow and the income that can potentially be generated by high-quality assets.

“As the Fed cuts policy rates, short-term interest rates generally move lower than long-term rates — the yield curve steepens,” notes Matt Diczok, Head of Fixed Income Strategy for the Chief Investment Office, Merrill and Bank of America Private Bank. “In this environment, the prudent use of leverage is a tactic that might help investors earn tax-efficient, positive carry on longer-dated, cash flow positive assets.”

What is positive carry and how can it help?

Positive carry occurs when your borrowing cost is below your portfolio’s potential expected return. In today’s interest rate environment, using a securities‑based loan or other custom solution may allow you access to liquidity while staying fully invested — supporting after-tax efficiency and long-term potential growth.

For example, assume the composition of your portfolio has a 5–7% expected average annual return, and that borrowing costs fall within a 4.5–5.5% range (depending on credit profile and collateral). Within those ranges, positive carry can occur when the portfolio’s return exceeds the borrowing cost.

Since interest rate policies are always shifting, it’s important to closely monitor your use of leverage as interest rate spikes or significant market downturns pose risks. Leverage can provide quick and easy access to liquidity (but offers no guarantee of a positive impact on the trajectory of your financial future). You could opt to maintain a large allocation to cash in your portfolio or sell off certain investments or assets. But both of those options would likely disrupt your wealth plan — by limiting your growth potential or potentially increasing your tax liability.

Alternatively, you could take advantage of your portfolio’s positive carry by borrowing against your investment holdings. This approach can provide liquidity while helping to minimize disruption to your long-term investment strategy and asset allocation.

Holding too much cash can stifle potential growth

While maintaining a sizable cash allocation may be the simplest liquidity solution, the opportunity cost associated with not being fully invested can be substantial. Consider two hypothetical $10 million portfolios.

Assuming an 7% average annual return for stocks and a 3% average annual return for cash, after a 10-year period:

Investment Comparison After 10 Years

The difference illustrates just how much wealth-building potential can be lost by maintaining a large cash position over a long period of time. And this doesn’t factor in the impact of inflation (which can quickly outpace the lower rate of return on cash equivalents) or the potential capital gains taxes required to replenish your cash reserves.

This hypothetical example does not depict any specific investment and is not intended to imply any guarantees. Actual investment results will vary across accounts based on the account activity and strategy, among other items.

Selling off portfolio holdings could trigger taxes

Let’s assume that over time you’ve amassed a $10 million investment portfolio. One day, a $1 million commercial property that you’ve wanted to purchase unexpectedly comes on the market. You could quickly liquidate portfolio holdings to come up with the necessary cash. But doing so would likely trigger a significant capital gains tax liability and reduce a material portion of your investment dollars (resulting in lost growth potential). Additionally, this might disrupt your target asset allocation, requiring portfolio rebalancing which potentially could lead to further tax consequences.

Borrow vs. Liquidate

Liquidity without disruption

Alternatively, you can leverage the liability side of your personal balance sheet. By borrowing against your investment portfolio, you have the means to access liquidity without having to disrupt your investment strategy and potentially trigger capital gains taxes.

For High‑Net‑Worth (HNW) and Ultra‑High‑Net‑Worth (UHNW) clients, it’s a flexible and efficient way to manage both your liquidity needs and your balance sheet. Your advisor can help you explore both the benefits and the risks of:

• Secured lines of credit using a Private Credit Line (a flexible line of credit from Bank of America, N.A.) with no closing costs or fees, or a Bank of America home equity line of credit (HELOC)
• Custom lending solutions from Bank of America designed to leverage other assets you may own (e.g., marketable securities, commercial property, hedge fund positions, fine art collections, intellectual property or an aircraft/yacht)

Interest you pay on a securities-based loan may also be tax-deductible if the loan proceeds are used to generate taxable income, such as purchasing other taxable investments (outside of your portfolio holdings) like commercial real estate, making improvements to a rental property subject to certain limitations or funding a business expansion. And by maintaining investment continuity, you continue to receive dividends, interest and potential appreciation — factors that contribute to total return and may help sustain positive carry conditions when markets allow. Both PCL and securities-based loans cannot be used to purchase securities.

Wealth preservation opportunities

Rather than selling highly appreciated securities and triggering capital gains taxes, a loan allows those investments to remain in your portfolio — preserving exposure to potential market appreciation — and potentially benefiting from an adjustment in cost basis to fair market value at the time of your death, which may eliminate capital gains entirely.

3 more ways Bank of America’s strategic lending solutions could help your wealth plan

Plan ahead

Before leveraging your portfolio to generate liquidity, make sure you have a plan in place for occasional times when positive carry turns negative for a while. Your advisor can help you plan in advance for related challenges such as capital calls, refinance risk and/or potential covenant violations.

Opportunistic liquidity management is about:

• Looking ahead and seeing the bigger picture
• Aligning borrowing with your goals, risk tolerance and long-term strategy
• Creating a wealth plan designed to work for you today and in the future
• Using credit wisely to stay invested and potentially accelerate wealth creation

Borrowing isn’t right for every investor, but when used strategically, it can become a powerful tool for attempting to grow, preserve and transfer wealth. Because leveraged solutions carry meaningfully higher risk than holding assets outright, they should be used selectively, with a clear plan for managing collateral, liquidity and potential market stress scenarios. Talk with your advisor to determine how this approach might help strengthen your wealth plan. Your advisor can provide access to Bank of America's credit solutions for your consideration.

Risks

Securities-based financing involves special risks and is not for everyone. When considering a securities-based loan, consideration should be given to your personal requirements, portfolio composition and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. The securities or other assets in any collateral account may be sold to meet a collateral call without notice to you, you are not entitled to an extension of time on the collateral call, and you are not entitled to choose which securities (or other assets) will be sold. You could potentially lose more funds than deposited in such collateral account. Securities-based loans may not be used to purchase or carry securities.

*Please consult your tax advisor regarding interest deductibility.

Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).

Credit facilities are provided by Bank of America, N.A., Member FDIC, its subsidiaries or other bank subsidiaries of Bank of America Corporation, each an Equal Opportunity Lender. All loans and collateral are subject to credit approval and may require the filing of financing statements or other lien notices in public records. Asset-based and securities-based financing involves special risks and is not for everyone. When considering an asset-based and/or securities-based loan, consideration should be given to individual requirements, asset portfolio composition, and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. For any loan with securities collateral, the securities or other assets in any collateral account may be sold to meet a collateral call as provided in the definitive loan documents and the client is not entitled to choose which securities or other assets will be sold. A complete description of the loan terms will be found in the individual credit facility documentation and agreements. Clients should consult with their own independent tax and legal advisors.

Banking, mortgage and home equity products offered by Bank of America, N.A., and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation. Equal Housing Lender. Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice.

Custom lending may involve special risks and may not be appropriate for all clients. In particular, custom lending may be subject to additional credit and legal approval because of special risks and restrictions that need to be carefully considered. Real estate financing and specific program options and property types may not be available in all states and may be subject to change from time to time. As a general rule with respect to each client, consideration must be given to capital gains tax implications, portfolio makeup and risk tolerance, portfolio performance expectations, and investment time horizon.

Securities-based financing involves certain risks. We can help you take into account your individual requirements, portfolio composition and risk tolerance, as well as capital gains taxes, portfolio performance expectations and investment time horizon. Securities-based financing may not be in the best interest for all clients. The loan is secured by assets in your Merrill account(s). Market fluctuations may result in a collateral call, and you may need to deposit additional cash and/or securities to meet the call or risk liquidation of your securities at an unfavorable price. In some cases, the securities pledged as collateral may be liquidated. Among other things, this may have negative tax implications for you, especially if the liquidation price of the securities liquidated exceeds your basis. The firm can sell your assets to meet a collateral call without notifying you, and you are not entitled to choose which securities in the account will be sold. You are not entitled to an extension of time to meet a collateral call.

The Private Client Line is offered by Bank of America Private Bank and not by or through Merrill Lynch, Pierce, Fenner & Smith Incorporated. A decrease in the market value of the pledged securities and other investments may require the deposit of additional funds or the liquidation of some or all of the pledged securities and assets. The Private Client Line is uncommitted, and a complete description of the loan terms can be found within your loan agreement. Please note the following risks associated with securities-based loans:

Securities-based loans and using stock as collateral involve a high degree of risk. The investor should read the loan agreement carefully so he or she understands his or her obligations.

Market conditions can magnify any potential loss. If the market turns against the investor, he or she may be required to deposit additional securities and/or cash in the account.

The securities in the account may be sold in the event that the collateral is deemed insufficient for the level of borrowing, and the bank can sell investors’ securities without contacting them.

Some or all of the securities pledged as collateral may be sold at prices higher than what it initially cost the investor to acquire the securities. If that happens, the investor may suffer adverse tax consequences. The investor should consult a tax advisor in order to fully understand the tax implications associated with pledging securities as loan collateral.