The Federal Reserve's decision to raise the federal funds rate from near zero to above five percent in the 2022-2023 hiking cycle was the most consequential credit market event of the post-financial-crisis era. It tested every credit market structure that had been built on the assumption of indefinitely low rates and revealed which businesses, underwriting approaches, and capital structures were genuinely resilient and which were dependent on cheap money.
The aftermath — the easing cycle that began in late 2024 and the stabilization of rates at a higher-than-pre-pandemic level — has produced a credit market environment that is superficially similar to the pre-pandemic period but fundamentally different in ways that experienced practitioners must internalize.
What Changed Permanently
The most important permanent change in the credit risk calculus is the recalibration of what "normal" borrowing costs look like. After a decade in which SOFR was effectively zero and borrowers could finance at all-in rates of 3-4%, the establishment of a new normal around 5-6% all-in for leveraged borrowers has reset the minimum free cash flow requirement for a viable credit.
Businesses that were viable credit investments at low all-in rates but are not at current rates are not temporary casualties of the rate cycle — they are businesses whose financial models were not as robust as their underwriting implied. The cycle has been a form of market discipline that sorted the genuinely cash-flow-generative businesses from those that required financial engineering to appear profitable.
The Floating vs. Fixed Distinction
The rate cycle also dramatically changed the relative attractiveness of floating and fixed rate credit instruments. The rapid rise in SOFR was simultaneously a windfall for lenders in floating-rate instruments (direct lending, leveraged loans, BDCs) and a stress event for borrowers in those same instruments. The result was a compression of the yield advantage that floating-rate instruments held over fixed-rate alternatives — as SOFR rose toward the fixed rates on high-yield bonds, the classic rationale for the loan market's floating-rate risk premium became less relevant.
In the current environment, with rates stabilized at higher-than-pre-pandemic levels, the floating vs. fixed analysis requires genuinely fresh thinking rather than the application of pre-2022 frameworks.
The Permanent Valuation Reset
Perhaps the most lasting legacy of the rate cycle is the reset of credit market valuations to a higher-rate environment. Investment strategies, return expectations, and portfolio construction frameworks that assumed a 2-3% base rate must be rebuilt around a 4-5% base rate. For credit investors who adapted quickly, the rate cycle created excellent vintages in 2022-2023. For those who adapted slowly, it created years of unrealized losses and portfolio management challenges.
The lesson for the current environment is not to assume that the current higher-rate equilibrium is temporary — or that the next cycle will necessarily return rates to zero.