Where is AI-related bond supply concentrated?

  • Morgan Stanley notes that the supply of corporate credit bonds from AI-related companies remains high, with investment-grade issuance concentrated in the technology and communications sectors. If large cloud providers issue more regularly, the pressure on the market to absorb new bonds could become more manageable.
  • Industry data also show the concentration of supply: over the past 12 months, net issuance in US investment-grade credit was approximately 153 billion dollars in technology and 106 billion dollars in communications; net issuance across all sectors was approximately 608 billion dollars.
  • Supply pressure and credit spreads do not move in simple lockstep. The report observes that, over the past three months, changes in credit spreads across markets have generally been disconnected from the scale of net issuance.

Why the preference for investment-grade bonds?

  • Morgan Stanley's credit strategy team currently prefers investment-grade bonds to high-yield bonds: high interest rates are putting greater pressure on borrowers with weaker credit quality, so the bank favors higher-quality bonds.
  • These are two related but distinct considerations: regular issuance helps the market absorb new investment-grade bonds, while borrowers' credit quality determines their ability to withstand high interest rates.

Does an increase in government bond supply directly push up yields?

  • Over both the past 12 months and the past month, higher relative net issuance did not correspond to higher yields among the government bonds across markets and maturities compared in the report. Morgan Stanley believes inflation, monetary policy and term premiums have a greater influence on government bond yields.
  • Supply trends also vary by market: over the past three months, net issuance of US Treasuries was approximately 224 billion dollars, net issuance of eurozone government bonds was approximately negative 34 billion euros, and net issuance of UK government bonds was approximately 51 billion pounds.

How should this supply-tracking data be understood?

  • The report uses changes in the outstanding amounts in Bloomberg fixed-income indices as a high-frequency proxy for net supply, covering only bonds eligible for inclusion in the indices. Bonds entering or leaving an index, such as those moving from investment grade to high yield after a rating downgrade, also affect the data.
  • Because indices typically require bonds to have more than 12 months remaining to maturity, changes in outstanding amounts reflect the exit of bonds with about a year left to maturity, rather than only actual maturities during the period. The indicator is therefore better suited to comparing relative supply and relative value.