Thoughts on the Market

U.S. Treasurys are the foundation of the bond market. But our strategists Matthew Hornbach and Vishy Tirupattur explain the growing impact of corporate credit as AI financing accelerates.
Read more insights from Morgan Stanley.

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Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley.
Vishy Tirupattur: I am Vishy Tirupattur, Chief Fixed Income Strategist.
Matthew Hornbach: Today, the interplay between the U.S. Treasury market and the corporate bond market.
It's Tuesday, September 8th at 10am in New York.
So, Vishy, what I'd like to do is start by asking you what's going on in the corporate bond market? What's coming to market? How much duration does it have? Talk to us about the theme of AI in corporate bonds.
Vishy Tirupattur: So, this is what is happening. Hyperscalers have enormous CapEx needs, and they'll see opportunity for realizing return on invested capital; and in anticipation of that, the CapEx requirements for the AI infrastructure are enormous.
And the key motivation that underlies is that the demand for compute vastly exceeds the supply of compute. And that as long as that demand-supply imbalance is there, there is a continuing need for CapEx, and that CapEx needs to be financed.
And credit markets across the board, not just the unsecured market. You know, credit markets in public space, private, investment grade, unsecured, secured, high yield, below investment grade, leveraged loans, private credit – all of these channels of the credit markets are going to be deployed to enable that financing.
Matthew Hornbach: Now, Vishy, you've written about this extensively over the course of the past year and have really been on the forefront of expecting a lot of supply. But have you even been surprised at the scale of the supply that we've gotten from these hyperscalers?
Vishy Tirupattur: We are surprised, not so much by the scale of the issuance, but certainly by the breadth and the depth of these markets. And also, the ability of the markets to deal with complexity associated with this issuance. So, you know, about a year ago, we were expecting that much of this would be investment grade only; much of this would be only U.S. dollar denominated. We were wrong.
We have seen issuance in seven currencies, and we have seen issuance substantially happen in investment grade, but also in high yield and in leverage loans. And a lot more in structured private investment grade credit and in securitized credit. We have been surprised by the ability of the markets to be both in their depth and the breadth and complexity; clearly been surprised.
Matthew Hornbach: And one of the features of some of the issuance that may have been the most impactful on other markets has been the duration of unsecured AI-related financing. Talk to us a little bit about what's going on there.
Vishy Tirupattur: So, if you look at the AI infrastructure, you can think of it in many different forms. One way of thinking about is the data centers building – the fab, the LAN, the chips and the servers. If you took the whole data centers, their expected life is something north of 20 years. And there is a lot of CapEx requirements.
So initially, when you're financing the entire data center as one package, there has been issuance that went well beyond the 20-year point in the term. And keep in mind that the CapEx requirements are kind of across the board.
So, it's not just been 20-plus year bonds. There have been bonds issued of various tenors, including a substantial supply of 20-plus year of duration.
Now what is happening is that the focus of some of that is changing towards more shorter-term component of it. So, we've gone from financing the entire data structure, moving towards financing components, and in particular chips.
The chips have a technological obsolescence factor associated with them. So, the chips need to be refinanced in about five years. So, the structures that are now increasingly emerging are towards amortizing structures that are more five-year duration, five-year maturity loans.
Matthew Hornbach: So, this sounds like an interesting shift from much longer duration, longer maturity issuance to something in what the U.S. Treasury would call the belly of the curve. Kind of in the two to five-year maturity sector. Is that right?
Vishy Tirupattur: So yes and no, and I'm hedging only for the following reason: Because a lot of this issuance, these issuers are relatively new in their size of these issuance, so they have not established a certain cadence of issuance.
It is not that they have given up on the longer maturity, but the focus is shifting. We expect more to the five-year point of the curve.
Another important thing is there has been a significant political pushback on the data centers. We have seen moratoria in the state of New York. It's a very live issue in much of the midterm elections. And opposition to data center is bipartisan, and it's very much alive.
So, because of this, we may have some slowdown in the buildup of data centers, therefore slowdown in the long-term CapEx. But then near term, you know, the chips that were bought a few years ago need to be replenished and new chips need to be deployed.
So, that financing focus might shift from a longer term to a shorter term. But that said, they're not going to let go entirely of the longer-term financing. Just the focus will shift towards the mid five-year term.
Matthew Hornbach: That's very interesting because in the U.S. Treasury market, the focus has not been on the five-year sector. It has been further out the yield curve, where 30-year Treasury yields have been making highs for; that we haven't seen for a couple of decades now. And it hasn't been just in the nominal yield component of Treasuries; it's been in the real yield as well.
And, in fact, the difference between the nominal and the real yield, the so-called break-even inflation rate, has actually been very stable throughout this move higher in overall bond yields.
Vishy Tirupattur: So, Matt, let me ask you this question. For the last several weeks, we have seen long-end rates, particularly 20-plus year rates being persistently high. What is in your mind driving this persistently high yield in the 20-plus year category?
Matthew Hornbach: So, this is something that Treasury Secretary Bessent alluded to in his recent interview on CNBC – that the month of August tends to be a month of lower transaction volumes in the U.S. Treasury market. And in particular, the middle of the month tends to be the lowest transaction volume period within any given month.
And so, what we think might be going on is that investors who have been investing in these corporate bonds that you've talked about – may be preparing their own balance sheets for the issuance that most people tend to expect to come in September.
Now, if that was the case, then it would be reasonable to assume that those investors tried to sell some of the bonds that they had. Or perhaps just stop buying any bonds in preparation for the supply that they would expect to come in September. If that was the case and the dealer community had to absorb that duration risk onto their balance sheets, they probably would want to recycle that back into the market.
And the most liquid way of doing that is to sell treasuries. And so, we do think that there was very likely some selling of treasuries by the dealer community, as they were absorbing corporate bonds from the investor base.
Vishy Tirupattur: So that makes sense, Matt. You know, if you think about the dealer community as well as investors, their anticipation of future; corporate bond issuance could drive their actions today.
But the only point I would make is that because these are new issuers, and because they have not established a cadence, there could be substantial variability in their frequency. And periodicity that will come to the market. And in what tenor.
You know, there's this change I talked about – longer term for financing needs versus component financing needs. There are all these degrees of freedom these issuers have that they can use that degrees of freedom. And the investors and the dealers don't have a lot of sense of what that might be.
Matthew Hornbach: It sounds like there's going to be a lot of uncertainty, which might mean that there's going to be a lot of volatility.
So, with that Vishy, thanks for sitting down and talking about the bond market with me.
Vishy Tirupattur: Great to hang out with you, Matt.
Matthew Hornbach: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen. And share the podcast with a friend or colleague today.

Investors have plenty to digest this month, from economic data to central-bank decisions. Our Global Head of Fixed Income Research Andrew Sheets outlines what could drive the next bout of volatility.
Read more insights from Morgan Stanley.

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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, several catalysts for more volatility later this month.
It's Friday, September 4th at 2pm in London.
Over more than a century of market history, Septembers have tended to see more volatility than the average month. You can't exactly set your watch by it, but the trend is definitely there. As investors come back from summer and capital market activity restarts in earnest, things historically tend to move.
This idea seems especially relevant this year. Despite the headlines, it was a pretty calm summer for markets. Since early June, U.S. stocks, yields, and credit were all modestly higher, and they got there with minimal movement. The realized volatility – that is how much these markets are moving on a daily basis – has been historically low.
September offers a number of catalysts that could test that.
First and foremost is the Fed. Inflation remains above the central bank's target, and markets are pricing a roughly two out of three chance of a rate hike at the September 16th meeting. That's more uncertainty this close to a meeting than we've had in a while – and the impact goes far beyond a single decision. Live meetings from the Bank of Japan and the European Central Bank also loom in September.
September is also a month that historically sees unusually heavy capital market activity. That makes sense. If you're a corporate and looking to raise money, it's often better to wait until investors are back from the summer before going out looking for those funds.
But this September could be unusually active, given a growing IPO pipeline and continued funding needs from AI-related construction. And so, it's fair to say that even adjusting for September's usually heavy pace, there's an unusually wide range of outcomes around where capital market activity could land this month.
Investors are also coming back from the summer with major uncertainty still hanging over global energy markets. Morgan Stanley's commodity team still sees global energy flows as severely restricted and recently raised their forecast for oil prices, seeing them reach about $100 a barrel in the fourth quarter of this year.
The price of what's in that barrel is becoming even more extreme, with the price of diesel fuel in Europe up 140 percent since January 1st. And so, as inventories continue to draw down and questions around the duration of this conflict persist, both factors could drive more market movements.
The good news is that while Septembers have historically been more volatile months, they're not necessarily a bellwether. And that could apply again. By month-end, we should have a much better idea of the Fed's path, the scale of capital market activity, and the state of energy supply.
But until then, the level of expected volatility across many markets, particularly interest rate and foreign exchange markets, remains unusually low. Given this backdrop, we think those levels of expected volatility can rise.
Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

Our Global Commodities Strategist Martijn Rats explains how tightening supply and shrinking buffers are pushing Brent prices up again, and what that would mean for fuel costs and energy markets.
Read more insights from Morgan Stanley.

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Martijn Rats: Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist.
Today: why the oil market is tightening, and why we now see Brent reaching $100 per barrel later this year.
It’s Thursday, September 3rd, at 3pm in London.
It has been an extraordinary summer for oil. Brent — the global benchmark price for crude oil and the reference point for most of the world's oil trade — traded above $110 per barrel in mid-May, fell to $71 by early June, climbed back above $100 three weeks later, and then dropped again to around $79 per barrel. More recently, prices have moved higher again.
But the question now is whether that is just another temporary swing. Or whether there is a sign that the underlying market has changed.
We think it has changed. Supply is tightening, inventories are falling, and some of the buffers that helped absorb earlier disruptions are fading.
The clearest evidence is in inventories. Crude oil sitting on the water fell from nearly 1.3 billion barrels in mid-July to 1.1 billion barrels recently. That was a decline of about 190 million barrels. During one four-week stretch, oil-on-water fell at the unusually high rate of 5.3 million barrels a day, the fastest four-week decline since this data series began about eight years ago.
Usually, when there is such a large amount of crude oil that is brought on land, it drives up onshore oil inventories. However, not on this occasion. On a global basis, onshore crude oil inventories have fallen by another 38 million barrels over the same period. That means that those offshore barrels arriving were being used straight away rather than put into land-based storage.
The biggest supply issue is still the Middle East. Crude flows from the Strait of Hormuz briefly recovered to about 15 million barrels a day after the June Memorandum of Understanding. That was close to the pre-conflict level. More recently, however, they have been running again around about 7 million. Now, Red Sea exports have also fallen sharply, from about 4 - 4.5 million barrels a day in March and April to around about 1.5 million barrels a day at the moment. Therefore, total regional exports are still up from the lows in March and April, but they are sharply down from that late June peak.
Another source of support is fading: strategic petroleum reserves. Globally, those releases added around 2.5 million barrels a day to supply in March and April. But that has fallen sharply, and we do not anticipate material further releases from global SPRs after September.
Then China is important, too. Its seaborne crude imports are normally around 10 to 11 million barrels a day but briefly fell as low as 5 million barrels a day leaving more oil available elsewhere. Now, China's buying activity still appears low, but at a minimum it has stabilized, and there are tentative signs of an increase. If Chinese imports have stopped falling and possibly go into reverse, they can no longer free up additional barrels for buyers elsewhere, making the global oil market tighter.
So why hasn’t crude become even more constrained? It's because of refineries. Global refinery outages are running 5 - 6 million barrels a day above normal. Although supply of crude oil is constrained, this means that demand for crude is also reduced.
Now, the result of that is that the tightness in the system has instead shown up in refined products rather than in crude. And diesel is the clearest example of this; and the one most likely to be felt throughout the economy, since diesel prices feed straight through into trucking, freight, farming costs, and many other areas.
The front-month diesel benchmark in the U.S. was recently around $195 per barrel, versus Brent at $95 per barrel. The difference between the value of a refined product and the crude used to make it is called a crack spread. For diesel, that crack spread reached around $100 per barrel, an all-time high.
Over time, that gives refiners a very strong incentive to bring back capacity where they can. If they do, crude demand should rise, whilst inventories are already falling and Middle East supply so far remains constrained.
We now expect a full recovery in Middle East supply to take well into 2027. On that path, oil inventories should keep falling throughout the fourth quarter of this year as well as the first quarter of next year. We now forecast Brent to average $100 per barrel in the fourth quarter.
Now, for much of this year, the oil market had several shock absorbers: strategic reserves, abundant barrels at sea, and unusually weak Chinese imports all helped. Those cushions are thinner now. That leaves less room for another disruption, just as the road back to normal supply is getting longer.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Midterm elections, backlash against data centers and a U.S.-China summit. Michael Zezas and Ariana Salvatore discuss themes that could test investor confidence in the coming months.
Read more insights from Morgan Stanley.

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Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Deputy Global Head of Research for Morgan Stanley.
Ariana Salvatore: And I'm Ariana Salvatore, Head of Public Policy Research.
Michael Zezas: Today, we'll look ahead to public policy catalysts that matter for investors this fall.
It's Wednesday, September 2nd at 10:30am in New York.
Okay, Ariana, there's a few days left in the summer, and investors are already starting to think about what's going to happen this fall. And there's a pretty heavy calendar; everything from midterm elections to some pretty important diplomatic dates. High level, what do you think people need to focus on?
Ariana Salvatore: So, I'll start with probably the most consequential catalyst of the list that you mentioned, and that's the midterm elections. Obviously, not until November 3rd, but the debate is going to start to emerge over the coming weeks – in terms of if Democrats were to win just one chamber versus both chambers; if Republicans were to keep control; what could that mean for markets? And what are the durable policy themes?
I think in this context, the biggest debate far and away is on data center pushback. And this has transitioned from more of a macro thematic. So, investors trying to understand the potential implications for the CapEx build-out, to more of a micro really granular question, right? Which races are the ones that we need to watch? Where are there states or jurisdictions that projects that are pending could be possibly called into question?
And that's, sort of, the continuous debate that I've had recently with investors, trying to pinpoint it more precisely to figure out where exactly the build-up could be impacted.
Michael Zezas: So, I hear from investors this general concern that the midterm elections will reveal that it's become a consensus preference amongst American voters and members of both parties to slow down on data center spending. Or perhaps even stop it or something more severe like that.
What type of midterm election outcome would point to that as a possibility?
Ariana Salvatore: Well, I would start by saying the politics here are scrambled in the sense that there's no clear fault lines when it comes to Democrats or Republicans around data center opposition, right? We are seeing some pretty notable pivots even from lawmakers that in the past were supportive of data centers. So that's why I think we have to zoom into these really specific races.
And there I would say there's some governorships that matter actually more than some of the Senate races; because remember, governors also in certain states can appoint public utility commissioners. And in places like Texas, that actually could be a really consequential outcome for the 2026 midterm elections, more so than who ends up sitting in Congress on a very federal level.
Michael Zezas: Okay. And so, would you say it's fair then that folks running for office who are challenging incumbents in both parties, who are expressing a desire for more regulation on data centers, that it kind of cuts across both parties? So, this is more about folks challenging incumbents than it is about one party or the other having a specific view on AI and the AI industrial build-out via data centers?
Ariana Salvatore: That's right. It's hard to sort into these really generic party umbrellas, and there are a few nuances under the surface. If you look at something like Ohio. The governor's race there, both the Republican and Democrat candidates are proposing a conditional build-out, basically. So, if certain projects meet criteria, they're going to be allowed to proceed.
In other races, like in Texas and Pennsylvania governorships, you're seeing the opponents basically propose a more restrictive form of the pause or directive that's already in place. So, I would say it's not very clean in terms of Democrat or Republican-led. And that just gives us conviction that this is going to persist and remain an issue even after November. Even though the federal policy incentives we don't think are likely going to change.
Michael Zezas: So, we could see investors taking a signal about the AI data center build-out from an outcome where incumbents don't do particularly well.
Now, I know we're still doing work on this, but what's the current thinking about – even if we were to see a result like that, how much should investors be concerned that the expectations around spending on data centers might not be realized because of new policy, other regulatory changes that would come as a result of the midterms?
Ariana Salvatore: So, I would say overall, we are still very constructive on AI CapEx, right? So, our internet team is still forecasting over a trillion dollars of spending for the hyperscalers next year, and there are a few reasons for that, one of which has to do with this AI sovereignty theme that we've been writing about.
So, this notion that governments are increasingly wanting to control their own stack and their own AI capabilities, so that's driving a bit of the spend. On the other hand, we are starting to see mitigation measures from some of these companies to appease some of that local community backlash. And there we don't see a one-size-fits-all approach.
We see very tailored solutions depending on what the source of the pushback is. Just to give a few examples. When you have communities that care about electricity price increases, for example, many hyperscalers have signed on to the Ratepayer Protection Pledge. When you have communities that care about the environmental impact, you've got companies like Google who said they want to put forward a regulatory framework for water usage; Amazon also disclosing their water usage in data centers.
And so, like I said, there's not really a uniformity to these responses, but enough that we think will mitigate the concern and still leaves us constructive on the overall build-out.
Michael Zezas: Right. And you actually bring up a really interesting point on the idea of AI sovereignty. Some of the kind of similar concerns that are driving voter anxiety around the build-out of AI, might also reinforce some of the spending that has to happen there. To the extent that voters and policymakers are concerned that AI should be controlled and aligned with American values would require some spending to make sure that there's sufficient supply chains and other variables in play that the U.S. is in control of.
Is that fair?
Ariana Salvatore: That's right. That's one of the clear policy consequences we see from this shift in sovereign AI and governments seeking that control. The other one is, of course, the potential for further tech restrictions and divergence between the U.S. and China on AI specifically.
Michael Zezas: So, on the topic of China and the U.S., one date that you point out here is September 24th, a date when the U.S. and China are going to be meeting again. What's on the table for discussion? What do investors need to know? Obviously, there have been concerns over the past year about the level of tariffs and trade tensions between the two.
Is there anything here that we need to pay specific attention to?
Ariana Salvatore: So, we think the overarching goal for both sides is to maintain this managed stability that was established in the May summit too. At that point, the clear deliverables were around trade, right? So agricultural purchases, Boeing purchases, et cetera.
We think there's likely some small incremental change to those deliverables, in particular when it comes to AI dialogue. But notably, we think there's potential for escalation into that summit, again, within the bounds of what we call tactical escalation. But we do think that there's plenty of room for more policy escalation between both the U.S. and China in line with some recent action that we've seen over the past few weeks.
Michael Zezas: Got it. And there's also a couple of important considerations around fiscal policy, funding, the National Defense Authorization Act (NDAA). Can you talk us through that a bit?
Ariana Salvatore: Yeah, so fiscal's been in the headlines recently as well, just given the Treasury buybacks and crossing that $40 trillion threshold. And I think in that context, it sort of puts a renewed spotlight on government funding.
There we see a potential latent risk of another shutdown come December, right? So, we saw a continuing resolution pass both the House and the Senate and sort of punt that debate until after the elections.
And then the NDAA is the annual bill that funds the Pentagon. It has to be done in December on a bipartisan basis. So, the elections have the potential to shift the incentive structure for some lawmakers, and we could see these, kind of, re-emerge as really big debates towards the end of the year.
Michael Zezas: Now, interestingly enough, we've got a bunch of catalysts to pay attention to: midterms, the potential for data center pushback as a consequence of it, a U.S.-China summit, which we think is going to result in the continuation of managed stability, and fiscal catalysts where, you know, the debt and the deficit have been in scope and concern, particularly for equity investors. All of that is happening against a backdrop where the historical norm going into midterm elections – is one where the equity market tends to struggle a bit. Is that fair?
Ariana Salvatore: Yeah. So, we tend to see a little bit of negative seasonality into the midterm elections, and our equity strategy team has pointed out the potential for a knee-jerk reaction if you were to see Democratic outperformance in November. We think that's not likely to be durable. We think it's more so the case that investors are going to pull forward the anticipation of Democrats doing well in the 2028 presidential election.
We don't think that's going to be a long-lasting theme in the market, but it's typically in line with what we see during elections.
Michael Zezas: So, this idea that there are going to be seasonal challenges to the equity market is important to take on board, particularly when there are a lot of policy narratives which in the investor's mind could reinforce the price action that comes with weak seasonality.
But our view is that you need to keep your eye on the secular trends here underpinning economic growth, including the AI build-out, which we think at the moment is going to be less sensitive to some of these policy outcomes than it might seem – given strong campaign rhetoric around restricting data centers.
Is that a fair statement?
Ariana Salvatore: Yes, that's right.
Michael Zezas: Great. Well, Ariana, thanks for taking the time to talk.
Ariana Salvatore: Pleasure speaking with you, Mike.
Michael Zezas: And thanks for listening. Ariana, what should our audience do next?
Ariana Salvatore: If you enjoyed the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

As AI agents gain access to sensitive enterprise systems, companies need new ways to control what they can do. Meta Marshall breaks down the emerging market for agentic identity security.
Read more insights from Morgan Stanley.

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Meta Marshall: Welcome to Thoughts on the Market. I’m Meta Marshall, Morgan Stanley’s U.S. Cybersecurity and Telecom & Network Equipment analyst.
Today: AI assistants are starting to act on our behalf at work, which brings up a critical question. What should these agents be allowed to do? And how should those permissions be granted?
It’s Tuesday, September 1st, at 10am in New York.
More and more, AI is helping us get through the workday. We ask it to summarize documents, analyze data and take notes during meetings. Increasingly, though, these tools are moving beyond just answering questions to acting on our behalf.
Suddenly, the security challenge shifts from managing a tool to governing a whole new digital workforce. In coming years, this problem should get bigger as we estimate seeing 79 AI agents and 109 machine identities for every human employee.
Now, traditional identity security at work was built to answer two basic questions: Who are you, and what can you access? Think of it as your office badge. It identifies you and determines what doors you can open.
AI agents, however, make that question much harder to answer. They can operate autonomously, move across applications and databases, collaborate with other agents. They take actions without direct human involvement.
So, companies need to know not only what an agent can access, but why it needs access, for how long, and what it actually did. That’s the core foundation of agentic identity solutions.
The risk environment from this problem is already substantial. About 80 percent of breaches in the work environment today involve stolen or misused credentials. Nine out of 10 organizations experienced an identity-related breach in the past year, and 83 percent experienced at least two. Now add potentially hundreds of machine and AI identities for every human; each operating continuously and at machine speed – and the problem is much larger.
One solution to managing AI agents is zero standing privilege.
Instead of giving an agent permanent access, you give it permission for a specific task and revoke that permission when the job is done. Here’s the issue though: Today, only 39 percent of privileged access is managed through this just-in-time or zero standing privilege architecture. And the reality is that humans can’t approve every request. More of those decisions will need to happen automatically, in real time, through what’s known as runtime governance.
We estimate, as a result, that agentic identity alone could become roughly a $33 billion global opportunity in our base case, which brings the overall identity market opportunity to more than $60 billion in coming years.
This need for agentic identity coming from AI could also push a historically fragmented industry towards a more unified platform. In one industry survey, 85 percent of organizations said fragmented identity systems delay their human response to identity threats, with respondents citing an average of 12 hours needed to respond per incident. We think that favors platforms that can manage human and machine identities together and make security decisions dynamically, overall making a more secure environment.
This transition won’t happen overnight. Agentic identity products are still early, and we don’t expect an immediate financial impact. But as enterprises move from experimenting with AI agents to deploying them more broadly, spending to secure those agents could become a more meaningful growth tailwind in 2027.
The longer-term growth opportunity comes down to a simple dynamic: more agents, with more autonomy, will require more control. And that could make identity security essential to scaling AI across the enterprise.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.