Morgan Stanley analysts said they anticipate further weakening in spreads on asset-backed securities (ABS) linked to artificial intelligence and data center lending after observing a broadening in corporate credit spreads over the last six weeks.
The bank pointed to $360 billion of global fixed income issuance year-to-date as a factor that has pressured corporate credit. Over the period since mid-June, investment grade-rated secured data center bonds widened by about 40 basis points, while high-yield data center bonds have moved around 120 basis points wider.
Despite those moves in corporate paper, the securitized credit market has shown only a muted response so far. Morgan Stanley noted that pricing in July remained largely steady even as corporate credit weakened, particularly for senior tranches of ABS. Secondary market spreads in the ABS market have drifted only modestly wider.
The bank offered several explanations for the relative stability of ABS and commercial mortgage-backed securities (CMBS). Market participants had already priced in expectations for elevated issuance, and low liquidity in secondary trading makes clear price discovery difficult. Morgan Stanley highlighted that total ABS and CMBS issuance of $18 billion represents 64% of fiscal 2025 supply, a pace the bank described as modest when compared with the corporate credit market where issuance has already surpassed fiscal 2025 volumes.
Another factor cited by the bank is that the assets underlying recent ABS and CMBS transactions are fully stabilized, which may lower volatility tied to political pushback and construction risk that can affect more development-focused deals.
On positioning, Morgan Stanley said it prefers BBB-rated securities for their relative value and stressed a view that compute capacity is structurally undersupplied over the medium term. The bank described potential entry points if ABS spreads were to widen further - specifically, it would consider buying single A-rated ABS should spreads move above 200 basis points, and BBB-rated securities should spreads exceed 300 basis points.
Within data center exposures, Morgan Stanley indicated a defensive tilt toward colocation-focused ABS rather than hyperscaler-backed deals, citing growing attention to single-name hyperscaler risk.
Market context
- Corporate data center bonds have widened meaningfully since mid-June: +40 bps for investment grade secured, +120 bps for high yield.
- ABS and CMBS issuance sits at $18 billion year-to-date, equivalent to 64% of fiscal 2025 supply.
- Morgan Stanley prefers BBB-rated ABS for relative value and favors colocation over hyperscaler-backed structures.