Market narratives can be 昀椀ckle things. A year ago, as the This has, in turn, led to a reconsideration of credit market Fed was taking base rates to levels that were unimaginable narratives. A year ago, we warned of the “triumphalism” just two years’ prior (Figure 1), market participants prepared that characterized discussions of private credit’s for the recession most analysts thought was necessary to displacement of more traditional forms of 昀椀nance. Banks extirpate price pressures from the system. It was further have not only returned to the market in force in 2024, but assumed that once in昀氀ation returned to target, the Fed much of their activity has been concentrated on re昀椀nancing would swiftly take base rates back down to more “normal” borrowers out of the more expensive loans originated levels, leaving longer-term discount rates largely una昀昀ected. during the period when private credit was “the only game These broadly shared expectations produced a plunge in in town.” A recalibration of expectations seems in order. M&A activity and defensive market positioning, as investors awaited signs of the inevitable downturn and aggressive Bank disintermediation continues to gather pace, but new rate cuts that would soon follow. competitive fault lines have emerged. It is one thing to disintermediate loans from bank balance sheets. It’s quite The economy proved more resilient than expected. U.S. GDP another to disintermediate the banks themselves from their growth accelerated in the period following the Fed’s last rate most prized clients and customers. As more credit market hike, even as in昀氀ation waned. The new narrative, born in the assets inevitably gravitate from banks to private portfolios, wake of the November 2023 FOMC meeting, was that the risk expect banks to mount a more vigorous defense of the of recession had dropped materially but the expected rate smaller, but more lucrative, remaining territories; willing to cuts would arrive just the same (Figure 2, page 4). This set cede assets but not the relationships responsible for their the stage for a remarkable rally in asset prices and market most important income streams. liquidity conditions. Figure 1. Markets Priced 5.3% Base Rates as a 1-in-1 Million Event Figure 1. Source: Carlyle Analysis of Federal Reserve Data, Bloomberg, November 2023. There is no guarantee any trends will continue. 3