Morgan Stanley: Issuance of Bonds by Mega Corporations May Diminish the Attractiveness of European Credit

Morgan Stanley: Issuance of Bonds by Super-Sized Enterprises May Diminish the Attractiveness of European Credit Hugh Briscoe, a senior strategist at Morgan Stanley Investment Management, recently pointed out that as super-sized data center operators increase bond issuance in Europe to finance artificial intelligence infrastructure, the valuation advantage of European investment-grade credit relative to the United States may gradually weaken. He believes that the valuation advantage faces the risk of reversal: previously, the massive borrowing by U.S. markets to finance AI infrastructure for tech companies made European investment-grade bonds more attractive in terms of valuation. However, Briscoe warns that if bond issuance in Europe shows a significant increase compared to the U.S., this valuation advantage will be eroded. Cost of financing drives issuance shift: The higher cost of financing for super-sized enterprises in the U.S. is prompting them to systematically turn to the European market in search of diversified funding channels. Tech giants like Alphabet and Meta have begun to issue large-scale bonds in markets denominated in euros and pounds. Supply shock drives up credit spreads: An influx of new bond supply may lead investors to sell existing holdings to free up funds, thereby pushing up credit spreads. Data shows that in July, the credit spreads for super-sized corporate bonds have expanded across the board, with the spreads for Meta and Oracle widening by approximately 22 and 29 basis points, respectively. Yield-driven approach replaces narrowing spreads: Briscoe emphasizes that the current returns in the credit market are mainly driven by coupon income, rather than narrowing spreads. It is anticipated that by the end of the year, high issuance volumes will lead to further widening of investment-grade bond spreads.