Last month, the Federal Reserve cut its key interest rate by 50 basis points (0.5%), the first cut since early 2020, when it cut rates to near zero at the start of the pandemic. It also marked the end of the Fed’s most aggressive rate-hiking cycle since the 1980s.

The higher interest rates that have prevailed since the beginning of 2022 have put a strain on many companies – including some in the credit industry. Consumers have accumulated huge amounts of credit card debt upstart (UPST) And Loan club (LC -0.18%) are two private lenders that could benefit significantly.

Higher interest rates have also weighed on real estate companies. Above all, AGNC investment (AGNC 0.10%) has struggled in recent years as higher interest rates drove up borrowing costs and depressed the book value of its mortgage-backed securities portfolio.

With interest rates falling, these three stocks could be smart buys today.

A “historic refinancing opportunity” could await Lending Club and Upstart

Consumer lending follows the cyclical nature of the economy. Throughout 2021, fiscal policies were loose, consumer balance sheets were strong, and access to credit was easy. As a result, consumer lenders like Upstart and Lending Club saw strong demand for their loans.

However, the tide changed when inflation skyrocketed and the Fed began raising interest rates to rein in price growth. As the cost of personal loans rose, demand from borrowers fell. Meanwhile, investors who had bought this type of debt from lenders pulled back sharply, waiting for more certainty about the direction of interest rates. As a result, Upstart’s loan volume fell from $11.8 billion in 2021 to $4.6 billion in 2023.

However, things are changing. Upstart has found more partners to buy up its loans – what’s needed now is for consumer demand to pick up again. And with U.S. consumers saddled with huge credit card debt, this could be retail lenders’ time to shine.

According to the Federal Reserve Bank of New York, consumer credit card balances totaled $1.14 trillion at the end of the second quarter. Not only is credit card debt at an all-time high, but interest rates on credit card loans are currently averaging around 23%, near their highest level on record.

If interest rates drop significantly, Upstart and Lending Club could see a surge in personal borrowing as people look to refinance and consolidate their debt at lower interest rates.

Lending Club Chief Executive Officer Scott Sanborn called this a “historic refinancing opportunity.” The company has prepared for this and developed tools to help consumers monitor and manage their debt and allow members to easily convert their credit card balances to single payment plans.

With more interest rate cuts expected over the next few years, this seems like an excellent time to buy Upstart and Lending Club.

AGNC Investment should benefit from lower borrowing costs

Real estate companies have had a tough time lately, especially those that rely on leverage. This category includes AGNC Investment, a mortgage real estate investment trust (mREIT) that uses leverage to purchase and hold agency mortgage-backed securities (MBS).

Unlike other real estate investment trusts (REITs) that buy and rent real estate, AGNC makes money from the difference between the interest income it earns from its MBS portfolio and the borrowing costs it pays. Because it borrows money in the short term and invests in mortgage-backed securities over the long term, it is very sensitive to changes in the yield curve (the relationship between interest rates and the remaining life of a security).

This sensitivity became particularly clear with the Fed’s interest rate increases. Last year, AGNC’s interest income rose 28% to $2 billion due to higher interest rates. However, borrowing costs rose more sharply and interest expense rose to $2.3 billion from $625 million in 2022. As a result, the REIT’s net interest loss was $246 million in 2023, compared to net interest income of $965 million in 2022 and $1.3 billion in 2021 – before the rate hike cycle began.

If the Fed cuts interest rates, it will help bring down short-term borrowing costs quickly, while longer-term borrowing costs could remain higher.

A steeper yield curve, where the difference between short-term and long-term interest rates widens, would benefit AGNC in the form of lower borrowing costs as the company invests in higher-yielding mortgage-backed securities. Due to its recent investments in higher-yielding mortgage-backed securities, its average return on assets of 4.69% at the end of the second quarter was more than double the average return of 2.31% at the end of 2021.

The Fed has officially initiated a rate cutting cycle, and according to this CME According to the FedWatch tool, market participants expect a rate cut of 1.5 percentage points in the next 12 months. Falling interest rates should help increase AGNC’s net interest margin and the book value of its portfolio, giving the company and the stock a much-needed boost over the next year or two.