Our Chief Fixed Income Strategist Vishy Tirupattur responds to
some of the feedback from clients on Morgan Stanley’s 2026 global
outlooks.
Read more insights from Morgan Stanley.
----- Transcript -----
Vishy Tirupattur: Welcome to Thoughts on
the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed
Income Strategist.
Today, I consider the pushback we've received on our 2026
outlooks – distilling the themes that drew the most debate and
our responses to the debates.
It’s Tuesday, Dec 16th at 3:30pm in New York.
It's been a few weeks [since] we published our 2026 outlooks for
the global economy and markets. We’ve had lots of wide-ranging
conversations, much dialogue and debate with our clients across
the globe on the key themes that we laid out in our outlook.
Feedback has ranged from strong alignment to pointed
disagreement, with many nuanced views in between. We welcome this
dialogue, especially the pushback, as it forces us to re-examine
our assumptions and refine our thinking.
Our constructive stance on AI and data center-related CapEx,
along with the pivotal role we see for the credit market
channels, drew notable scrutiny. Our 2026 CapEx projections
was anchored by a strong conviction – that demand for compute
will far outstrip the supply over the next several years. We
remain confident that credit markets across unsecured,
structured, and securitized instruments in both public and
private domains will be central to the financing of the next wave
of AI-driven investments. The crucial point here is that we think
this spending will be relatively insensitive to the macro
conditions, i.e., the level of interest rates and economic
growth. Regarding the level of AI investment, we received a bit
of pushback on our economics forecast: Why don’t we forecast even
more growth from AI CapEx? From our perspective, that is going to
be a multi-year process, so the growth implications also extend
over time.
Our U.S. credit strategists’ forecast for IG bond supply – $2.25
trillion in gross issuance; that’s up 25 percent year-over-year,
or $1 trillion in net issuance; that’s 60 percent year-over-year
– garnered significant attention. There was some pushback to the
volume of the issuance we project. As CapEx growth outpaces
revenue and pressures free cash flow, credit becomes a key
financing bridge. Importantly, AI is not the sole driver of the
surge that we forecast. A pick-up in M&A activity and the
resulting increase in acquisition-driven IG supply also will
play a key role, in our view.
We also received pushback on our expectation for modest widening
in credit spreads, roughly 15 basis points in investment grade,
which we still think will remain near the low end of the
historical ranges despite this massive surge in supply. Some
clients argued for more widening, but we note that the bulk of
the AI-related issuance will come from high-quality – you know
AAA-AA rated issuers – which are currently underrepresented in
credit markets relative to their equity market weight.
Additionally, continued policy easing – two more rate cuts –
modest economic re-acceleration, and persistent demand from
yield-focused buyers should help to anchor the spreads.
Our macro strategists’ framing of 2026 as a transition year for
global rates – from synchronized tightening to asynchronous
normalization as central banks approach equilibrium – was broadly
well received, as was their call for government bond yields to
remain broadly range-bound. However, their view that markets will
price in a dovish tilt to Fed policy sparked considerable debate.
While there was broad agreement on the outlook for yield curve
steepening, the nature of that steepening – bull steepening or
bear steepening – remained a point of contention.
Outside the U.S., the biggest pushback was to the call on the ECB
cutting rates two more times in 2026. Our economists disagreed
with President Lagarde – that the disinflationary process has
ended. Even with moderate continued euro area growth on German
fiscal expansion, but consolidation elsewhere, we still see an
output gap that will eventually lead inflation to undershoot the
ECB’s 2 percent target.
We also engaged in lively dialogue and debate on China. The key
debate here comes down to a micro versus macro story. Put
differently, the market is not the economy and the economy is not
the market. Sentiment on investments in China has turned around
this year, and our strategists are on board with that view.
However, from an economics point of view, we see deflation
continuing and fiscal policy from Beijing as a bit too modest to
spark near-term reflation.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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