Is the Credit Cycle Overheating?

Andrew Sheets, head of Corporate Credit Research at Morgan Stanley, discusses the outlook for global credit markets in 2026, predicting a period where the credit cycle intensifies before it concludes. He attributes this to a stimulative environment with central bank rate cuts, increased government spending, easing regulatory policy, and a significant investment cycle driven by artificial intelligence. Sheets draws parallels to 2005 or 1997-1998, periods characterized by similar levels of capital expenditure, merger activity, interest rates, and unemployment. He forecasts a substantial rise in net issuance for U.S. investment grade, driven by AI funding, CapEx, and M&A, which is expected to widen U.S. spreads. Other regions like Europe and Asia, along with global high yield, are projected to outperform U.S. investment grade due to less relative issuance. The podcast concludes by outlining potential risks, including a recession or an even stronger surge in corporate supply and aggression, which could lead to wider spreads.