Inside the Biggest Bond Boom in Years

Andrew Sheets (0:00)

Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Anish Shah (0:06)

I'm Anish Shah, Global Head of Debt Capital Markets.

Rehan Latif (0:08)

I'm Rehan Latif, Global Head of Credit Trading.

Samer Oweida (0:11)

And I'm Samar Oweida, Global Head of Foreign Exchange and Emerging Markets.

Andrew Sheets (0:15)

Today, a discussion of historical levels of bond issuance and how it could affect the broader markets. It's Wednesday, October 21st at 9 a.m. in New York.

Gentlemen, it's great to talk with you. I think what we're talking about is an issue that really cuts across all parts of Morgan Stanley's businesses, from issuance to credit trading to macro markets and beyond. And I'd like to get into it, but just quickly to kind of frame where we are. Anish, we are in the midst of a historic investment cycle in AI CapEx. We're in the midst of a very large pickup in M&A activity that I also want to make sure we get into. But you sit at the intersection of our capital markets businesses, talk a little bit about what we're seeing in the bond issuance space.

Anish Shah (1:01)

Sure, Andrew. I look after all of our new issue capital markets business in credit.

That's across the credit spectrum and across geographies. I'm constantly looking to Rehan for the latest in investor sentiment and how we can deliver the right product for issuing clients and to Samar on macro views that impact our clients every day. We are in the midst of a significant decommoditization of new issue credit markets and a decompression in credit. It's really driven by four important factors. One is, as you note, unprecedented levels of issuance. Investment grade debt volumes are up almost 25% on the year. That's driven by the AI capex theme and a resurgence in M&A. Number two is the rate backdrop has been, to date, pretty constructive for credit. We've seen $100 billion of new cash come into investment grade credit. We've seen new pools of investors drive tremendous new capacity into credit markets, whether it be insurance capital fueled by annuity investments or other private credit.

We're also seeing an increase in complexity, and that's driven by the AI capex cycle and the interconnectedness between hyperscalers, the chip makers, the neoclouds, the data centers, and that's requiring an unprecedented level of innovation in structuring new solutions for issuers. And the last is the market is grappling with supply-demand dynamics and winners and losers in the AI thematic.

Andrew Sheets (2:30)

Rehan, that's actually a great place to turn to you because you're on the other side of this, you're focused on can markets absorb all of this supply, and I often kind of hear two narratives. You know, one is everything is great. You've got record issuance and record supply into the credit markets.

And the other is cracks are forming. You're seeing widening of CCC spreads. You're seeing some headlines around some issuers running into more trouble. From your perch, how do you see things?

Rehan Latif (2:55)

So Andrew, instead of two, I'll give you three narratives within public credit trading.

One, you know, I agree with Anish. I think first of all, I've got to thank Anish because it's never been busier on the public credit side because of the amount of issuance coming through. But there are really three different themes coming through. One, investment grade has been incredibly strong. The higher quality part of the credit market is benefiting from all this new investor money coming through at these higher rate levels. For the longest period of my 20 year career, 20 plus year career, we were in a zero rate environment. At current yield levels, investment grade has never looked like a more attractive proposition.

You add in growth in the US and across the rest of the world. The reality is that investment grade looks like a very interesting investment thesis, and I think spreads continue to be appropriately priced for the risk. On the CCC side of the market, that's where we're seeing real dispersion, where we're seeing investors from the distressed community, from the higher community really have to figure out how to refinance some of these names, and that's been where the real challenge has been from a credit perspective.

And obviously, we've got the hyperscalers that have come through in a significant wave across many different parts of the capital market. So one thing Anish mentioned was the number of different financings that are available to the hyperscalers. So I do think that given the cash flows that these hyperscalers actually have, you've managed to be able to attract a new investor base to our market as well.