AI CapEx Financing and IG Bond Supply Challenges Global Rates

Key Quotes

"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."

Vishy Tirupattur explains that client feedback on Morgan Stanley's 2026 outlooks has been varied, encompassing both agreement and disagreement. Tirupattur values this pushback because it helps the firm to critically assess their underlying assumptions and improve their analyses.

"Our constructive stance on AI and data center related CapEx, along with the pivotal role we see for the credit markets channels, drew notable scrutiny. Our 2026 CapEx projections was anchored by a strong conviction that demand for compute will far outstrip supply over the next few years."

Vishy Tirupattur highlights that their projections for capital expenditures related to Artificial Intelligence and data centers, as well as the anticipated role of credit markets in financing these investments, faced significant questioning. Tirupattur states that this projection is based on a firm belief that the demand for computing power will exceed available supply for several years.

"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 pickup in M&A activity and the resulting increase in acquisition-driven IG supply also will play a key role in our view."

Vishy Tirupattur points out that as companies increase their capital expenditures faster than their revenues, leading to pressure on free cash flow, credit markets will become essential for financing. Tirupattur also notes that this projected increase in credit issuance is not solely due to AI, but also influenced by a rise in mergers and acquisitions.

"We also received pushback on our expectation for modest widening in credit spreads, our 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."

Vishy Tirupattur discusses the client disagreement regarding the forecast for a small increase in credit spreads for investment-grade bonds, which Morgan Stanley still anticipates will remain historically low. Tirupattur acknowledges that some clients expected greater widening, even with the projected substantial increase in bond supply.

"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."

Vishy Tirupattur indicates that while the general outlook for global rates and government bond yields was well-received, the specific expectation that markets would anticipate a more accommodative stance from the Federal Reserve generated significant discussion. Tirupattur notes that disagreement persisted on whether this yield curve steepening would be characterized as "bull steepening" or "bear steepening."

"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."

Vishy Tirupattur identifies a core debate regarding China, framing it as a divergence between microeconomic sentiment and macroeconomic realities. Tirupattur emphasizes that market perceptions and the actual economic conditions can operate independently of each other.