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Morgan Stanley Global Credit Research Summary

Date: April 11, 2025

Key Insights

1. Macro vs. Micro Dynamics

   • Abnormal Market Behavior: Despite stable corporate credit metrics (leverage, M&A activity), broader macro risks (weaker growth, higher inflation) dominate, resembling bear market conditions.
   • Fed Position: The Federal Reserve is unlikely to cut interest rates soon, adding to market uncertainty.
   • Geopolitical Risks: Tariffs and policy uncertainty worsen growth projections and inflation forecasts.

2. Global Credit Outlook

   • US Market: US Treasuries underperform amid tighter spreads, though long-end credit yields offer relative value.
   • European Credit: Recession risks are priced into spreads, but high-quality IG credits remain attractive.
   • Asia: Credit spreads remain tight, but valuation risks persist due to growth concerns.

3. Specific Asset Classes

   • Leveraged Finance: Downside risks for CCCs; single B-rated loans recommended for their carry and fundamentals.
   • Cash vs. CDS: Cash spreads may outperform CDS in the near term due to weaker flows and headline sensitivity.
   • Annuities: Demand remains strong for fixed-income investors amid high-yield opportunities.

4. Defensive Strategies

   • Utilities and non-cyclicals favored in the US and Europe for stable fundamentals.
   • AT1 securities underperform relative to equity yields, reducing appeal amid macro uncertainty.

Investment Themes

• Duration Over Cyclical Risk: Focus on longer-duration, high-quality credits in USD, EUR, and GBP.
• Valuation Opportunities: Credit cycles appear intact despite tighter spreads, with excess returns aligning with long-term trends.

Key Recommendations

• Avoid High-Risk Segments: Reduce exposure to BB- and below-rated credits; CCCs face maturity risks.
• Defensive Credit Allocation: Prioritize IG U.S. Treasuries, European IG, and global SOFR-linked strategies.
• Margin of Safety: Monitor supply-demand dynamics before entering weaker segments like HY or emerging Asia.

Critical Note on Uncertainty

• Taper Trajectory: Tariffs and policy shifts create a two-tier scenario, requiring differentiated asset allocation.
• Valuation Caution: For higher-beta credits, assess fundamentals before chasing what appears cheap.

Disclaimer: Investment involves significant risks. Recommendations are based on current assumptions, subject to change.