Figure 2. Simultaneous Drop in Recession Probabilities & Forward Interest Rates A MARKET LOOKING MORE LIKE 2021 large-cap tech stocks. Bitcoin has nearly doubled. Meme THAN 2022-23 coins are back in vogue. And credit markets have been red hot, with spreads at the tightest levels since the onset of The proximate spark for the recent rally in asset prices was the pandemic and bond and loan issuance at record levels the strongly hinted conclusion to the Fed’s tightening cycle through the 昀椀rst two months of the year (Figure 4, page 5). in November 2023, followed by the promise of rate cuts the following month. These announcements were premised on Re昀椀nancing has been the main driver of 2024 issuance, a rate of disin昀氀ation (at that time) that would have returned accounting for more than 64% of leveraged loans and 88% of core in昀氀ation to the Fed’s target by June 2024. Since then, high-yield bonds (M&A accounted for a trivial share of year- the monthly rate of disin昀氀ation has more than halved, which to-date issuance, though one suspects that’s likely to change would push the return of “price stability” out to the middle meaningfully in the months ahead; Figure 5, page 6). And of next year. Futures markets have dialed back rate cut a non-trivial share of that re昀椀nancing involves borrowers expectations, from nearly seven at the start of the year to opportunistically swapping out private credit in favor of just three now (Figure 3, page 5). cheaper syndicated loans. On average, private lenders charged 650 basis points over SOFR for loans extended This retracement has done little to dent investor enthusiasm. in 2022 and 2023 (Figure 6, page 6). With markets wide The stock market is up by more than 25% since the Fed open and spreads on bank-arranged 昀椀rst lien term loans signaled base rates had peaked. And, unlike prior rallies, averaging less 400bps, it’s no surprise to see borrowers take participation has been broad-based, with the 25% gain in advantage, even in cases that involve a 1% or 2% prepayment the small cap Russell 2000 nearly matching the 30% rise in fee (“call protection”).1 Figure 2. Source: Carlyle Analysis; FRBP Survey of Professional Forecasters, March 2024; ICE BAML Indices, Bloomberg, March 2024. There is no guarantee any trends will continue. 1. Pitchbook, Weekly Market Wrap, March 2024. 4