Live from Morgan Stanley’s Asian Pacific Summit, our Chief Fixed
Income Strategist Vishy Tirupattur explains why micro trends are
likely to be more on focus than macro shocks next year.
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, coming to you from the Morgan Stanley Asia
Pacific Summit underway in Singapore. Much of the client
conversation at the summit was about the market outlook for
2026.
In the last few days, you've heard from my colleagues about our
outlook for the global economy, equities and cross asset markets.
On today's podcast, I will focus on the outlook and key themes
ahead for the global fixed income market.
It's Thursday, November 20th at 10am in Singapore.
Last year, the difficulty of predicting policy really complicated
our task. This year brings its own challenges. But what we see is
micro trends driving the markets in ways that adapt to a
generally positive stance on risk. Our economists’ base case sees
continued disinflation and growth converging towards potential by
2027, with the possibility that the potential itself improves.
Notably, they present upside scenarios exploring stronger demand
and rising productivity, while the downside case remains
relatively benign. The U.S. remains pivotal, and the U.S. led
shocks – positive and negative – should drive outcomes for the
global economy and markets in 2026,
In 2025, the combination of a resilient U.S. consumer supported
by healthy balance sheets and rising wealth alongside robust AI
driven CapEx has underpinned growth and helped avoid recession
despite the headwinds of trade policy. These same dynamics should
continue to support the baseline outlook in 2026, even though the
path will be likely uneven. The Fed faces a familiar conundrum
softening labor markets versus solid spending. The baseline
assumes cuts to neutral as unemployment rises, followed by a
recovery in the second half.
Outside the U.S., most economies trend towards potential growth
and neutral policy rates by end of 2026, but the timing and the
trajectory vary. And as in recent years, global outcomes will
likely hinge on U.S.-led effects and their spillovers.
Our macro strategists expect government bond yields to stay range
bound, and it is really a story of two halves. A front-loaded
rally as the Fed cuts 50 basis points, pushing 10-year yields
lower by mid-year before drifting higher into the fourth quarter.
Curve steepening remains our high conviction call, especially two
tens curve. The dollar follows a similar arc, softening mid-year,
and then rebounding into the year end.
AI financing moves to the forefront putting credit markets in
focus, a topic that has come up repeatedly in every single
meeting I've had in Singapore so far. So, from unsecured to
structured and securitized credit in both public markets and
private markets, credit will likely play a central role in
enabling the next wave of AI related investments. Our credit and
securitized credit strategists see data center financing in 2026
dominated by investment grade issuance.
While fundamentals in corporate and securitized credit remain
solid, the very scale of issuance ahead points to spread widening
investment grade and in data center related ABS. Carry remains a
key driver for credit returns, but dispersion should rise.
Segments relatively insulated from the AI related supply such as
U.S. high yield, agency brokerage backed securities, non-agency
CMBS and RMBS are poised to outperform. We favor agency MBS and
senior securitized tranches over U.S. investment grade,
especially as domestic bank demand for agency MBS returns post
finalization of the Basel III.
2025 was a tough year to navigate, and while we are constructive
on 2026, it won't be a walk in the park. The challenges ahead
look different. Less about macro shocks, more about micro shifts
and market nuance. More details in our outlooks published just a
few days ago.
Thanks for listening If you like the podcast, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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