Thoughts on the Market – "Lessons From a Bond Issued 90 Years Ago"

Host: Andrew Sheats, Head of Corporate Credit Research, Morgan Stanley
Date: October 9, 2025

Overview

In this episode, Andrew Sheats reflects on the first bond ever issued by Morgan Stanley—90 years ago. He explores the historical context of that bond, issued during the aftermath of the Great Depression, and draws timely lessons for today's market participants regarding credit spreads, risk, and investor behavior in uncertain times.

Key Discussion Points and Insights

1. Financial Crisis and the Birth of Modern Banking Regulation

• Setting the Stage:
  • Sheats recounts how the Great Depression (1929–1932) caused the U.S. stock market to collapse by 86%, unraveling both investor confidence and bank solvency.
  • "The same banks that were shepherding customer deposits were also involved in much riskier and more volatile financial market activity." (00:31)
• Regulatory Response:
  • Roosevelt’s administration responded in 1933 with major reforms, creating foundations like FDIC insurance and Social Security, and introducing the "somewhat unique American 30-year mortgage."
  • The Glass-Steagall Act divided banking, forcing firms to choose between commercial banking or capital markets activity.

2. Morgan Stanley and Its First Bond

• Founding of Morgan Stanley:
  • The firm was created in 1935 specifically for financial market trading and underwriting, per new regulation.
  • "Morgan Stanley was founded 90 years ago in 1935 to do the latter." (01:35)
• The 1935 Bond Deal:
  • Issued during ongoing economic uncertainty: unemployment above 17%, Europe struggling, World War II looming.
  • The S&P Composite Equity Index was just 12, compared to "around 6,700" today. (01:55)
• Details of the Bond:
  • A 30-year corporate bond for a AA-rated U.S. utility.
  • The yield: 3.55%, just 70 basis points over a comparable U.S. Treasury.
  • "The first bond Morgan Stanley helped issue...had a yield of just 3.55%. That was just 70 basis points over what a comparable U.S. Treasury bond offered at the time." (02:34)

3. Lessons for Modern Markets

• Credit Spreads in Uncertain Times:
  • Even amid extreme uncertainty, high-quality corporate bonds traded at low spreads—much lower than headlines or intuition might suggest.
• Historical Parallels:
  • The extra spread investors required for a 30-year AA utility bond after the Great Depression is "almost exactly the same as today." (03:01)
• Investor Takeaway:
  • "It's one more reason why we think we have to be quite judicious about turning too negative on corporate credit too early, even if the headline spreads look low." (03:16)

Notable Quotes and Memorable Moments

• On crisis and innovation:
  • "Many core aspects that we associate with modern financial life...rose directly out of policies from this administration and the financial ashes of this period." (00:58)
• History repeating:
  • "Anniversaries are nice to celebrate, but we think this example has some lessons for the modern day." (02:54)
• Cautious optimism:
  • "We have to be quite judicious about turning too negative on corporate credit too early, even if the headline spreads look low." (03:16)

Timestamps for Important Segments

• 00:00 – Introduction and historical context: Great Depression, bank instability, regulatory reform.
• 01:30 – Glass-Steagall Act and the founding of Morgan Stanley.
• 01:55 – Macro environment in 1935; S&P Index levels and economic recovery.
• 02:18 – Details of the first Morgan Stanley bond issue.
• 02:54 – Lessons for current markets: spreads and investor risk appetite.
• 03:16 – Final insights and cautions for interpreting low credit spreads.

Conclusion

Through the lens of a 90-year-old bond, this episode connects financial history to the present. Sheats encourages caution in overreacting to credit spread levels, illustrating that even in the bleakest economic climates, high-grade corporate bonds can, and did, trade at tight spreads—underscoring the value of credit discipline and context in market analysis.