Inside the Biggest Bond Boom in Years

Rehan Latif · Morgan Stanley

Investment grade credit looks very attractive at current yields, with spreads appropriately priced for the risk.

Higher-quality investment grade credit is benefiting from new investor money arriving at today's higher rate levels. After a long zero-rate period, current yields make investment grade the most attractive it has looked in Latif's career. Adding US and global growth, he sees investment grade as a very interesting investment thesis, and he believes spreads are appropriately priced for the risk.

“At current yield levels, investment grade has never looked like a more attractive proposition. ... the reality is that investment grade looks like a very interesting investment thesis”at 3:34

Rehan Latif · Morgan Stanley

CCC credit shows real dispersion, with distressed and high-yield investors struggling to refinance weaker names.

The strength in investment grade does not extend to the bottom of the credit market. In the CCC segment, Latif sees real dispersion, with distressed and high-yield investors having to work out how to refinance weaker issuers. He describes this as the real credit challenge. He ties it to a distressed market that was held together for a long time by a zero-rate environment, which has changed as rates rose.

“On the CCC side of the market, that's where we're seeing real dispersion, ... investors from the distressed community, from the high yield community really have to figure out how to refinance some of these names”at 3:51

Anish Shah · Morgan Stanley

AI capex issuers are relatively insensitive to high rates, since they expect very attractive long-term returns on investment.

From the view of hyperscalers, data center developers and chipmakers, there is a lot of optimism that long-term returns on AI investment will be very attractive despite the current higher rate environment. As a result, issuers show relative insensitivity to rates when accessing capital. The first wave of AI capex financing went mainly into the investment grade bond market, the deepest and fastest route to raising capital. Some issuers are now diversifying into other currencies and products.

“there's a lot of optimism that notwithstanding the current higher rate environment, 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.”at 7:21

Samer Oweida · Morgan Stanley

The AI capex cycle is among the most consequential in history; disciplined governments and firms will win, undisciplined ones will suffer.

Oweida describes the current AI capex cycle as one of the most consequential in post-industrial revolution history. He argues that the governments, jurisdictions and corporations with discipline and capacity around this growth will be the winners. Those without a clear policy will suffer the consequences. He notes that the capital that must be raised and debt issued over the next year or two is known, but the effect on underlying economic activity is not yet clear.

“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.”at 11:17

Samer Oweida · Morgan Stanley

The US economic backdrop remains strong, supporting very high levels of corporate and sponsor deal activity.

Oweida says the global economic backdrop, and particularly the US, continues to be strong. He points to very high levels of activity in Morgan Stanley's corporate and sponsor businesses as a result. This is the reason he gives for the high deal flow, alongside the uncertainty that drives hedging demand. He does not give quantitative evidence on growth.

“given that the economic background globally, and particularly in The US continues to be strong, we've just seen very high levels of activity coming out of our corporate and sponsors based businesses.”at 6:21

Anish Shah · Morgan Stanley

M&A resurgence is real: sponsor-owned assets are being sold to investment grade strategics at agreed valuations.

The M&A pickup is driven by a meeting of the minds on valuation. For the first time in years, large sponsor-owned private equity assets are coming to market and being acquired by investment grade corporate strategics. Acquirers are borrowing at higher rates than a few years ago but are paying what they see as appropriate valuations for assets that make long-term strategic sense. The deals also repay multi-billion dollar sponsor debt, recycling credit and freeing capacity in leveraged finance markets.

“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. ... they're able to acquire these assets at an appropriate valuation and it makes long term strategic sense.”at 8:11