Inside the Biggest Bond Boom in Years

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

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

Rehan Latif: I am Rehan Latif, Global Head of Credit Trading.

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

Andrew Sheets: Today, a discussion of historical levels of bond issuance and how it could affect the broader markets.

It's Wednesday, October 21st at 9am 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: Sure, Andrew. I look after all of our new issue capital markets business in credit, and that's across the credit spectrum and across geographies. And I'm constantly looking to Rehan for the latest in investor sentiment and how we can deliver the right product for our issuing clients. And to Samer 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 percent 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 neo clouds, 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: 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: So, Andrew, instead of two, I'll give you three narratives within public credit trading.

One, 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 U.S. 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 high yield 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 then obviously, you've got the hyperscalers that have come through in 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.

Andrew Sheets: Samar, we just heard that, you know, Anish has never been busier. Rehan has never been busier. There's clearly a very credit-specific story here. But, you know, this is something that I imagine is also top of mind in the macro markets.

You've got all of this supply. You've got AI that's kind of driving the market, but you've also got all these other broader issues around energy and deficits. How do you see the historic wave of credit supply fitting into the macro piece?

Samer Oweida: Well, maybe I'll start by also thanking Anish because our corporate derivative business, where we hedge exposure, whether it's on a deal basis or on a normal course basis for these issuers, has never been busier. And part of that is because of the historic issuance that's been discussed.

But part of that, Andrew, is also about the uncertainty that you mentioned in these markets. And so, this epic wave that we're seeing around hyperscalers and AI is happening at a time where energy prices are high, inflation is sticky, fiscal concerns abound, and there's a lot of uncertainty in the forward.

And so, what we've seen from a behavioral standpoint is clients having much more appetite to engage on these discussions because of the uncertainty and hedge that exposure.

What we've also seen is a lot of re-racking of traditional macro models and how do we think about what is the rate level that the economy can handle? What does that rate level mean for winners and losers by jurisdiction or by sector, as Rehan mentioned earlier?

And we've seen that manifest itself in a lot of the invested decisions that our clients have made over the course of the year, where we've seen capital and engagement go up with names both corporate and sovereign. Where there's a positive commodity story and there's a positive AI hyperscaler story.

And we've seen less investment around the jurisdictions and the names where that story is not the case. And so we're seeing some amount of divergence, but I think also given that the economic background globally, and particularly in the U.S., continues to be strong. We've just seen very high levels of activity coming out of our corporate and sponsors-based businesses.

Andrew Sheets: So, Anish, that brings me to a question I wanted to ask you about – which is, you know, Samer, you mentioned this, really important macro question is: at what point do higher rates slow down activity?

And yet, so far, activity's still been very solid, and it's not just AI. We've also seen a lot of strategic activity, a lot of M&A activity. I would love for you to take us inside the conversations that you're having with these companies – and how they're thinking about the environment. How much these current levels of interest rates are impacting their decision-making?

Anish Shah: Andrew, you could probably break that question down into two pieces.

One is in the AI ecosystem, where, you know, certainly there's a lot of optimism on the return on these investments. And so, sitting in the shoes of a hyperscaler or a data center developer or a chip maker, there's a lot of optimism that – notwithstanding the current higher rate environment, that the long-term return on these investments is going to be very, very attractive.

And so, we're seeing a relative level of insensitivity on rates from the issuer's perspective in accessing capital. The first wave of all of the AI CapEx has predominantly been in the investment-grade bond market. That's the deepest, most liquid, fastest way to raise capital and speed.

Now you're seeing some of these companies diversify into different currencies and different products, and that's been a really healthy technical for the markets. From an M&A context, I think a lot of the resurgence in activity is driven by the fact that there's a meeting of the minds in terms of valuation.

So, for the first time in many years, we're seeing large-scaled sponsor private equity-owned assets come to market and be acquired by an investment-grade corporate strategic. Yes, they are borrowing at higher rates than they would have a few years ago. But the view is that they're able to acquire these assets at an appropriate valuation, and it makes long-term strategic sense, and we're seeing just a big pickup in that activity.

I think that also has another implication for credit markets, which is some of these assets that have been long held by private equity sponsors had multi-billion dollar debt complexes that are going to be repaid as part of these transactions.

That's a recycling of credit. That's going to free up some capacity in the leverage finance markets as well.

Andrew Sheets: And yeah, Rehan, how do you think about that? Because, you know, again, we have these big macro forces of AI CapEx, and then these very micro company-specific stories around M&A. How do you see that impacting your backdrop?

Rehan Latif: Within credit, the biggest driver is always growth. You pay the rate that you pay simply because there's an expectation towards growth. When Anish talks about some of these developments that are happening within the market, these are all, you know, big paradigm shift in growth.

And, AI investment the reality is that we are at the forefront of creating the capital for that. And the reality is that the yield that is being paid; or the coupon that is being paid is essentially the price for that investment.

Investors are seeing that across all these different markets. I think we have to be very deliberate about the difference between investment-grade, investments in newer sectors, and what is actually happening within the more distressed part of the credit market.

Simply because that market has been challenged for a long time. That market was held together to a certain degree by a zero-rate environment. And that has changed quite dramatically as rates went higher and as the global economy has evolved as well.

So, from my perspective, this is all very healthy.

Rehan Latif: Samar, I'll let you have the last word here. You know, Anish and Rehan have talked about these historic waves of credit issuance. Part of that's coming from AI, but part of it's coming from M&A and strategic transactions. You know, we're sitting here on the eve of our Morgan Stanley Credit Symposium in New York. It's tomorrow. We have over 1,000 investors attending. I think that indicates just the amount of interest and focus on this space.

And yet, as you hear Anish talk about kind of the almost insensitivity of rates for some of these key borrowers, how does this impact how you're thinking about macro markets and how they could trade over the next six to twelve months?

Samer Oweida: I think it speaks to what both Anish and Rehan said in that between the growth and the higher level of rates, there are going to be winners and losers.

And what we can't predict is what energy markets or political developments or fiscal developments might have in store. But generally speaking, macro markets are responsive to underlying growth, inflation, and policy discipline. And I think as we go into the depths of what is one of the most consequential CapEx cycles in post-Industrial Revolution history, the governments, the jurisdictions, and the corporates that have discipline and capacity around this growth will be the winners.

We think so. We see that as on the go forward. And those that don't have a clear policy will suffer the consequences. I think that is still a very early innings discussion to be had. Lots of data still has to come through.

I think what we know is what is on the docket for the next year or two in terms of how much capital needs to be raised and debt issued. But what we don't know is how does that affect underlying economic activity.

And I think as that data manifests in conjunction with policy initiatives globally, there's a lot to be excited about. And there's a lot to be quite concerned about. And looking at how policy mistakes one way or the other might affect a lot of the behavioral patterns in credit markets and from an issuer standpoint.

Andrew Sheets: Gentlemen, thank you for taking the time to talk, and see you tomorrow at the conference. And thank you for listening. If you enjoy Thoughts the Market, please take a moment to rate and review us wherever you listen and tell a friend or colleague about us today.