Thoughts on the Market — 2026 Global Outlook: Micro Themes Take the Spotlight

Host: Vishy Tirupato, Chief Fixed Income Strategist, Morgan Stanley
Date: November 20, 2025

Episode Overview

This episode, recorded during the Morgan Stanley Asia Pacific Summit in Singapore, focuses on the 2026 outlook for global fixed income markets. Host Vishy Tirupato delves into how micro-level themes, rather than broad macroeconomic swings, are set to drive market performance in the coming year. He discusses expectations for interest rates, global economic growth, policy divergence, and how accelerated AI-driven investment shapes credit markets.

Key Discussion Points & Insights

1. Macro Environment and Baseline Outlook

• The base case for 2026 is continued disinflation and growth trending toward potential by 2027, with a possibility for an improvement in potential growth itself.
  • Quote: “Our economist base case sees continued disinflation and growth converging towards potential by 2027 with the possibility that potential itself improves.” (01:05)
• The U.S. remains the pivotal force—shocks from the U.S., whether positive or negative, are seen as the main drivers for global markets.
• Upside scenarios include stronger demand and rising productivity; downside risks considered “relatively benign.” (01:16)

2. U.S. Consumer & AI as Growth Pillars

• The resilient U.S. consumer, with healthy balance sheets and growing wealth, along with robust AI-driven capital expenditure, are responsible for avoiding recession in 2025 and are expected to underpin growth into 2026.
  • Quote: “In 2025, the combination of a resilient US consumer... alongside robust AI driven capex has underpinned growth and helped avoid recession.” (01:32)
• Despite trade policy headwinds, these trends are expected to continue, though the path is “likely uneven.”

3. Central Bank Policy & Interest Rate Outlook

• The Federal Reserve faces a “conundrum” balancing softening labor markets against solid consumer spending.
  • Baseline: Fed is expected to cut rates to neutral as unemployment rises, with recovery expected in the second half.
  • Non-U.S. economies will likely converge on potential growth and neutral policy rates by end of 2026, but the timing and degree will vary market by market.
  • Quote: “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.” (01:57)

4. Global Bond Yields and Curve Dynamics

• Government bond yields are likely to remain range-bound in 2026.
  • “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.” (02:20)
• Curve steepening, especially the 2s/10s, remains a high conviction call for Morgan Stanley macro strategists.
• The U.S. dollar is expected to follow a similar pattern: “softening mid year and then rebounding into year end.”

5. The Central Role of Credit Markets & AI Financing

• AI infrastructure financing, especially for data centers, is at the forefront of credit market discussions.
  • Every meeting at the Summit in Singapore highlighted how pivotal AI-related investments are for credit markets.
  • Quote: “AI financing moves to the forefront, putting credit markets in focus, a topic that’s come up repeatedly in every single meeting I've had in Singapore so far.” (02:48)
• Investment grade issuance is expected to dominate data center financing in 2026.
• The sheer volume of anticipated issuance may lead to spread widening in both investment grade and data center asset-backed securities (ABS).

6. Credit Market Segmentation & Opportunities

• “Carry remains a key driver for credit returns, but dispersion should rise.”
• Agency Mortgage-Backed Securities (MBS) and senior securitized tranches are favored over U.S. investment grade corporate bonds, especially due to renewed domestic bank demand post-Basel III implementation.
• Certain segments are poised to outperform by being insulated from AI-related supply:
  • U.S. High Yield
  • Agency Mortgage-Backed Securities (MBS)
  • Loan Agency CMBS (Commercial Mortgage-Backed Securities)
  • RMBS (Residential Mortgage-Backed Securities)
  • Quote: “Segments relatively insulated from the AI-related supply ... are poised to outperform. We favor agency MBS and senior securitized tranches over US investment grade...” (03:17)

7. Risks and Market Nuance

• 2025 was a tough year to navigate due to unpredictable shocks; 2026’s challenges are more about micro shifts and nuance in the market rather than broad macro shocks.
  • Quote: “The challenges ahead look different. Less about macro shocks, more about micro shifts and market nuance.” (03:51)

Notable Quotes & Memorable Moments

• “Our economist base case sees continued disinflation and growth converging towards potential by 2027...” (01:05)
• “In 2025, the combination of a resilient US consumer... alongside robust AI driven capex has underpinned growth and helped avoid recession.” (01:32)
• “The Fed faces a familiar conundrum, softening labor markets versus solid spending... cuts to neutral as unemployment rises followed by a recovery in the second half.” (01:57)
• “It is really a story of two halves: a front loaded rally...as the Fed cuts... pushing 10 year yields lower by mid year before drifting higher into the fourth quarter.” (02:20)
• “AI financing moves to the forefront, putting credit markets in focus, a topic that’s come up repeatedly in every single meeting I've had in Singapore so far.” (02:48)
• “We favor agency MBS and senior securitized tranches over US investment grade...” (03:17)
• “The challenges ahead look different. Less about macro shocks, more about micro shifts and market nuance.” (03:51)

Key Timestamps

• 00:02 — Opening and introduction from Vishy Tirupato
• 01:05 — Global economic base case for 2026 and US's pivotal role
• 01:32 — Role of US consumer and AI Capex in sustaining growth
• 01:57 — Fed policy outlook and global central bank divergence
• 02:20 — Government bond yield and curve forecasts
• 02:48 — AI-related financing and credit market outlook
• 03:17 — Preferred fixed income segments for 2026
• 03:51 — Market risk shifts: less macro, more micro nuance

Conclusion

The outlook for 2026 is constructive, favoring risk assets in a landscape increasingly defined by micro themes—sector-specific trends, especially in AI-driven investment—and market nuance over broad macro shocks. Credit markets, especially segments insulated from new AI-related supply, are expected to provide selective opportunities in the year ahead. For deeper data and strategy, listeners are encouraged to reference Morgan Stanley’s published global outlooks.