Welcome to Thoughts on the Market.
I am Vishay Tirupato, Morgan Stanley's Chief Fixed Income Strategist, coming to you from the Morgan Stanley Asia Pacific Summit underway in Singapore.
Much of the client conversation at the summit was about the market outlook for 2026.
In the last few days you've heard from my colleagues about our outlook for the global economy, equities and cross-asset markets.
On today's podcast, I will focus on the outlook and key themes ahead for the global fixed income market.
It's Thursday, November 20th at 10 a.m. in Singapore.
Last year, the difficulty of predicting policy really complicated our task.
This year brings its own challenges.
But what we see is micro trends driving the markets in ways that add up to a generally positive stance on risk.
Our economy's base case sees continued disinflation and growth converging towards potential by 2027, with the possibility that potential itself improves.
Notably, there present upside scenarios exploring stronger demand and rising productivity, while the downside case remains relatively benign.
The US remains pivotal and the US-led shocks—positive and and negative should drive outcomes for the global economy and markets in 2026.
In 2025.
The combination of a resilient US consumer, supported by healthy balance sheets and rising wealth, alongside robust AI-driven CapEx, has underpinned growth and helped avoid recession, despite the headwinds of trade policy.
These same dynamics should continue to support the baseline outlook in 2026, even though the path will be likely uneven.
The Fed faces a familiar conundrum, softening labor markets versus solid spending.
The baseline assumes cuts to neutral as unemployment rises, followed by a recovery in the second half.
Outside the US, most economies trend towards potential growth and neutral policy rates by end of 2026.
But the timing and the trajectory vary and, as in recent years, global outcomes will likely hinge on US-led effects and their spillovers.
Our macro strategists expect government bond yields to stay range bound.
And it is really a story of two halves.
A front-loaded rally as the Fed cuts 50 basis points, pushing 10-year yields lower by mid-year before drifting higher into the fourth quarter.
Curve steepening remains our high conviction call, especially two-tenths curve.
The dollar follows a similar arc, softening mid-year and then rebounding into the year end.
AI financing moves to the forefront, putting credit markets in focus, a topic that has come up repeatedly in every single meeting I've had in Singapore so far.
So, from unsecured to structured and securitized credit, in both public markets and private markets, credit will likely play a central role in enabling the next wave of AI-related investments.
Our credit and securitized credit strategies see data center financing in 2026, dominated by investment rate issuance.
While fundamentals in corporate and securitized credit remain solid, the very scale of issuance ahead points to spread widening in investment rate and in data center-related AVS.
Carry remains a key driver for credit returns, but dispersion should rise.
Segments relatively insulated from the AI-related supply, such as US high yield agency mortgage-backed securities, non-agency CMBS and RMBS, are poised to outperform.
We favor agent CMBS and senior securitized structures over US investment grade, especially as domestic bank demand for agent CMBS returns.
Post-finalization of the Basel III.
2025 was a tough year to navigate and, while we are constructive on 2026, it won't be a walk in the park.
The challenges ahead look different.
Less about macro shocks, more about micro shifts and market nuance.
More details in our outlooks published just a few days ago.
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