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Good afternoon, |
I walked through something this morning that I think deserves a closer look. |
It started with a comment from Scott Bessent — the former Soros CIO — who flagged growing credit risk at the sovereign level. Not overseas, but here. In the U.S. Treasury market. |
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That might sound extreme, but it lines up with what we're seeing: nearly $9 trillion in Treasury debt needs to roll over in the next twelve months, and it's all coming due at much higher rates. That alone has major implications for liquidity and capital flow. And it's not happening in isolation. |
Bitcoin is tracking global liquidity expansion again. Private credit is picking up the slack from shrinking regional bank balance sheets. And regulators are quietly pulling back on capital rules that were put in place after the GFC. |
This isn't about inflation anymore. And it's not just about the Fed. |
If you want to download the slides or watch the full breakdown, you'll find both below. Or keep scrolling — I've laid out the entire session section by section, with extra notes pulled from this morning's transcript. |
Just click the image below to view the full slide deck. |
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or watch the replay here. |
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Rates are no longer just about inflation or the Fed |
The idea that the Fed "controls" interest rates is outdated. That's what I walked through here. |
Yes, they set the short-term benchmark. But the real pressure is coming from the sheer scale of debt issuance. With nearly $9 trillion in Treasuries rolling over this year, the market itself is now determining where yields settle — not Jerome Powell. |
I showed how these rollover dynamics are creating a structural buyer's strike: investors are demanding more yield because they know more supply is coming. Foreign central banks aren't stepping in like they used to. Domestic institutions are already holding losses on their current books. That leaves fewer natural buyers… and higher yields as the clearing price. |
This is why you can have rising yields even when inflation is cooling — because the rate isn't compensating for inflation. It's compensating for credit risk and structural supply. |
And it's why we're seeing long-end volatility spike when no one's expecting it. |
The Fed isn't setting the price. The market is. |
Regional and Community Banks |
There's still a lot of focus on "too big to fail," but it's the smaller banks that are most exposed right now — and the cracks are visible. |
In the presentation, I shared how small and mid-sized banks are still sitting on hundreds of billions of dollars in unrealized losses, largely from securities purchased during the ZIRP era. These aren't hypothetical. They're sitting right there on the balance sheet — and regulators are giving them room to ignore the marks. |
But that doesn't fix the problem. These banks are also facing higher deposit costs and slowing loan growth, which puts pressure on earnings. They don't have the scale or the product mix to offset these shifts like JPMorgan or Bank of America. And they can't compete with the rates offered by money market funds or Treasurys — so deposits are leaving. |
What I laid out this morning was simple: |
Unrealized losses aren't going away — they're just being papered over Funding costs are rising while lending margins shrink And capital rules may be eased, not tightened, making the system more fragile
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This is why the consolidation wave is coming. Not because of some crisis. But because the math doesn't work anymore. |
Bigger get bigger, get stronger. The small get bought or fail. |
I don't think you need a black swan event to see how this plays out. The market is already moving toward consolidation — not because of panic, but because the balance sheets at smaller banks don't work in this environment. |
In the slides, I showed how the top 25 U.S. banks have continued to grow both deposits and market share since 2020. Meanwhile, regional and community banks have lost ground on both. The system is bifurcating — scale is becoming the edge. |
Bigger banks can weather higher funding costs. They have more access to short-term liquidity. They can absorb regulatory shifts. And most importantly, they have the flexibility to pick and choose which loans to make — or buy outright. |
What we're seeing is a quiet form of forced M&A. Some of it will be voluntary. Some won't. But the trajectory is clear: |
Top 10 banks are absorbing deposits Small banks are bleeding margin and loan volume The middle tier is shrinking fastest
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This is the setup for private credit to step in — which is exactly where we went next in the session. |
Is a Regional Bank M&A Wave Coming? |
It's not just possible — it's already underway. The conditions are lined up, and the incentives are strong. |
In this section, I broke down how smaller banks — particularly regionals and community lenders — are boxed in on multiple fronts: |
Unrealized losses are still sitting on their books Funding costs continue to rise Loan growth is slowing And regulatory capital relief may be coming, but not fast enough
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Put simply, the path forward for many of these banks is narrowing. Their stock prices are under pressure. Their return on assets is shrinking. And private equity is circling. |
We've already seen several high-profile bank acquisitions this year — not from a place of panic, but from necessity. And that trend is likely to accelerate as the market revalues these businesses not on brand strength, but on balance sheet durability. |
In the presentation, I walked through recent deal activity and laid out why the next wave of M&A will likely include: |
Banks with high CRE exposure Institutions under $10 billion in assets And those with deposit flight and negative operating leverage
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The shift won't be dramatic. It will be constant. And it will reshape the middle tier of American banking — one transaction at a time. |
Is a Great Capital Rotation Underway? |
This was one of the key framing points I wanted to leave people with. |
We've been trained for decades to think about markets in terms of growth vs. value, or tech vs. energy — but what's happening now is bigger than that. It's a rotation of capital not just between sectors, but between types of capital access and structures of return. |
This isn't just about investors rotating from Tesla into Exxon. It's about capital flowing from public markets into private credit, from traditional banks into shadow banking, from speculative growth into income-focused strategies with defined payouts and clearer covenants. |
In the session, I laid out several key signals: |
Institutional flows moving out of high-beta exposure and into private yield Retail credit exposure being pulled back at the same time private lenders expand A macro backdrop where rates stay higher and capital costs reprice slowest at the smallest institutions
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This isn't just defensive — it's opportunistic. |
Yield is becoming the story. And whoever can underwrite it reliably — whether through direct lending, infrastructure, real assets, or defensive M&A — is going to outperform. |
The capital rotation is happening. The question is whether you're set up to follow it — or still chasing what's already been picked clean. |
Why It's Happening |
In this final part of the session, I walked through the deeper drivers behind the rotation we're seeing — not just the what, but the why. |
A few things are converging at once: |
Debt servicing costs have normalized higher. After nearly two decades of suppressed rates, the cost of capital has reset. That changes how institutions think about leverage, risk, and yield. Regulation is loosening at the exact moment risk is rising. We looked at how proposed capital rules are being walked back. The banks that are still under stress may soon have even fewer buffers — not more. Public markets have become less reliable as funding vehicles. I noted how IPOs remain sluggish, and how many companies are opting for private credit solutions because they offer speed, certainty, and structure. Liquidity is being quietly redirected. The TGA drawdown, RRP movements — these are nudging capital into different corners of the market. Not in response to risk-on behavior, but as a structural realignment.
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This isn't about fear. It's about efficiency. |
Investors are repositioning not because they're scared, but because the math is different now. They're chasing dependable cash flow. They're finding yield without giving up control. And in many cases, they're stepping around the traditional banking system entirely. |
This is what happens when capital starts behaving like capital again — not like a momentum trade. |
Where's the Flow? |
The most important thing to track right now isn't what investors are saying — it's what they're doing. |
Capital is moving quietly but deliberately out of long-duration growth and into income-focused structures. Private credit continues to attract institutional allocations, especially in areas where regional banks have pulled back. We're also seeing consistent interest in sectors tied to physical infrastructure — defense, energy, and logistics — as well as short-duration fixed income. |
It's not about chasing yield. It's about rebalancing exposure toward assets that are less sensitive to policy shifts and more grounded in cash flow. |
Flows reflect conviction — and right now, they point to stability, not speculation. |
Key Trends to Watch — and What Comes Next |
Everything we covered this morning points in the same direction: the structure of credit, capital, and market access is changing — slowly, but permanently. |
We're seeing the early stages of a new credit regime, where liquidity moves differently, regional banks play a smaller role, and private capital steps deeper into the system. Rates may stay elevated longer than expected, not because the Fed is tightening, but because the market is repricing risk from the ground up. |
This is where the opportunity lives — in understanding what's shifting, and adjusting ahead of it. |
I'll be live again today at 2 PM ET, and we'll keep building on this. I'll walk through what's happening with regional bank positioning, break down a few trade ideas tied to these trends, and take a closer look at where capital is quietly rotating next. |
If you're already a member, just head to the room like always. |
If you're not, this is a good time to step in. We're running a 30-day membership trial for just $7, which gives you access to all the live sessions, trade ideas, and member-only tools — including today's breakdown. [Click here to join and get access before 2 PM] |
See you there, |
Garrett Baldwin |
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