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Thoughts on the Market

Thoughts on the Market

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Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.Copyright gty Economia Finanza personale
Episodi
  • High Mortgage Rates and a Stuck Housing Market

    High Mortgage Rates and a Stuck Housing Market
    Oct 8 2026
    U.S. mortgage rates are hovering around their highest levels in three years. Morgan Stanley Co-Heads of Securitized Products Research Jay Bacow and James Egan examine the forces keeping homeowners locked in and buyers priced out of the housing market.Read more insights from Morgan Stanley.----- Transcript -----Jay Bacow: Jim, [we’re] getting a lot of questions about mortgage rates. We've been flying across the country talking to people. Are your arms tired?James Egan: I'm hoping that all the extra flapping will give them just a little bit more definition so we can show them off as we talk about adjustable-rate mortgages.Jay Bacow: And that is the definition of an ARM. Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of Securitized Products Research at Morgan Stanley.James Egan: And I'm Jim Egan, the other co-head of Securitized Products Research at Morgan StanleyJay Bacow: Today, we're here to talk about mortgage rates: how quickly they've moved, why they're here, where they might go, and what it means for the mortgage and housing market.It's Thursday, October 8th, at 9am in New York.Jim, as of this recording, the 10-year is over 5.3 percent. Rates haven't closed this high since 2002. The 30-year mortgage rate is around 7.5 percent. It’s about 150 basis points up since the beginning of February.James Egan: Right. There have been quick moves in rates that has led to quick moves in mortgage rates. There are a lot of implications to that – from affordability, the housing market, mortgage market.But when we think about the relationship between mortgage rates and interest rates, Jay, there's also a feedback mechanism there. Convexity hedging is what it's typically called.Can you discuss the role that that might have played in this current episode? And what we should expect going forward?Jay Bacow: Sure. So, the biggest driver of mortgage rates is Treasury rates. And Treasury rates are driven by a number of factors, and right now most people would point to inflation expectations and geopolitical concerns.However, as Treasury rates go higher, homeowners that currently have a mortgage are less likely to move. And because they're less likely to move, that means that the average life of those mortgages that investors own gets longer.And because mortgage investors typically want to keep their duration profile constant – as the average life of those mortgages gets longer, they are then going to need to either sell those mortgages or sell Treasuries, which will cause yields to go even higher.And there's a bit of a feedback loop on that, which can pressure yields and mortgage rates even higher.But what we would say is, at this point, we don't think there's a huge mechanism of that going through at this rate level. The average mortgage rate that homeowners have in America is almost exactly 4.5 percent. Obviously, they're less likely to move as rates go up. But they're 300 basis points out of the money.So, from that point, it matters. But it didn't matter as much as when rates were a little lower. However, Jim, 7.5 percent mortgage rate – what does this do for housing affordability? Can you put that in context?James Egan: Yeah. So, if we just think about this in terms of what a 7.5 percent mortgage rate implies for the monthly payment on the median-priced home, we are now up over $325 dollars if we use that 7.5 percent – assuming home prices are where they are today, incomes are where they are today.That monthly payment's up over $325 from where we are at local lows in February; or where we were at local lows in February. That's a 17 percent increase, in terms of that monthly payment over just a seven-month period.Jay Bacow: Alright, so, 17 percent increase over a seven-month period, that's kind of scary.But as you and I have talked about in the past, given the fixed rate nature of the U.S. mortgage market, it's a tad misleading for the average homeowner in America.So, what does this do to sales? Obviously, it's scary for new homeowners, though.James Egan: Right. Look, you brought up the implications from a duration perspective, a convexity hedging perspective. All of this is just how the lock-in effect continues to have material implications for the housing market, for mortgage markets.But yes, these affordability issues – not that bad for homeowners who have an average rate below 4.5 percent. That's not changing. Over 90 percent of the balance or count of mortgages, depending on how you want to look at it, in the United States remains fixed rate. Their payments aren't changing, right?But the marginal home buyer, things are getting less affordable. I don't like to use the term demand destruction. I think that sounds a little bit too over the top here. But like we are seeing some of our higher frequency or more leading indicator demand metrics show a little bit of softening here.Pending home sales, past two months, 3 to 5 percent down year-over-year. Purchase applications, which had been very ...
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    9 min
  • Will High Yields Crack the Market’s Resilience?

    Will High Yields Crack the Market’s Resilience?
    Oct 9 2026
    Markets have remained resilient despite the prospect of higher-for-longer rates. Our Global Head of Fixed Income Research Andrew Sheets considers the risks building beneath the surface.Read more insights from Morgan Stanley.
    ----- Transcript -----
    Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.Today, exploring further the question that seems to be on everyone's mind: At what point do higher rates become a problem for markets?It's Friday, October 9th, at 2pm in London.We recently hosted Morgan Stanley's ninth annual European Credit Conference here in London. Fifty companies, over a thousand investors, and to some extent, one dominating question.The market has been impressively resilient this year – but as yields rise, at what point does this change?I think a good place to start with this question is whether the current level of interest rates are obviously wrong. And I don't think it's clear that they are. Growth in the U.S., Europe, and Asia remains surprisingly robust and has for a lot of this year. Meanwhile, inflation across regions is still generally above central bank targets.Too high, and a sign that conditions are more likely too hot than too cold. That's the opposite of what the wrong level of rates would imply – as rates that were too high would be curtailing activity and pushing inflation down below target.Thanks in part to the scale of AI spending and how insensitive the spending has been to the level of interest rates; we're just not seeing this.I think the yield curve is also confirming this message that the level of rates for now is okay. In an environment where the market thinks that central banks have raised rates too much, it will often so-call invert the yield curve. Pushing short-term interest rates above longer-term ones on the belief that rates that are too high today will need to be lowered when conditions weaken in the future.We're not seeing that, and that is, I think, a pretty important indicator.At the risk of being pedantic, I think there's also the premise of the question around resilience. At one level, without a doubt, markets have been impressively solid given the large rise in yields this year. U.S. and European stocks have been posting double-digit gains. Credit spreads, a measure of risk premium, sit near multi-decade lows.But under the surface, that resilience isn't so apparent. Spreads on the lowest-rated credits, so-called triple CCCs, have increased significantly this year across both the U.S. and Europe. Publicly traded BDCs, which contain portfolios of lower-rated private credit, have traded at widening discounts to their book value.And even in the mighty U.S. stock market, my colleague Mike Wilson and our U.S. equity strategy team note that over half of the 3000 largest stocks have seen a drawdown of at least 20 percent since June, which happens to be the month that yields started to rise.2026 may be showing that global growth overall is just less sensitive to higher rates than was initially expected. Large government deficits in the U.S., Europe, and Asia, and large spending on AI may be two reasons why. With growth strong and inflation still too high, rates may be simply seeking out a level that they think will keep things in balance.But the interest rate that helps balance – this technology and spending boom – are not the same rates that keep a smaller, weaker, or a more indebted company happy. If higher rates are needed to balance things overall, the weaker tails of the market can still suffer.We've seen this in the past, particularly 2005. When simultaneous booms in CapEx in China and the U.S. housing market pushed up rates back then, the overall economy held up for several more years, while weaker pockets of credit suffered more quickly.Back then, a large U.S. government deficit, booming China CapEx, and significant U.S. housing wealth all helped push up rates. The overall economy held up for several more years. But weaker parts of the credit market were challenged by those rates more quickly.We think the same may be true today and therefore favor an upper quality bias. We favor high-yield bonds over loans and decompression across credit indices.Thank you as always for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.
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    5 min
  • The Politics of Powering AI

    The Politics of Powering AI
    Oct 12 2026
    Energy costs are a key election issue and AI data centers are adding to the debate. Our Head of Public Policy Research Ariana Salvatore looks at policy discussions in Washington that could determine how the U.S. powers its next technological boom.Read more insights from Morgan Stanley.----- Transcript ----- Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley. Today, I'll discuss the growing energy demands of AI and what the government can do in response. It's Monday, October 12th at 10am in New York. Markets and policymakers are preparing for a potentially important debate following the November elections. The future of American energy infrastructure. And at the center of that debate is an increasingly urgent question: How can the U.S. build enough power infrastructure to support the AI investment cycle – without passing the costs on to everyday electricity consumers? Late last month, lawmakers in Congress introduced the bipartisan American Affordability and Jobs Act. That legislation represents a significant effort to reform federal permitting. But importantly, it also includes provisions that require data centers to cover the transmission costs associated with their projects. We think that's a notable development, particularly as we think about the legislative agenda after the November elections. Of course, the path forward still remains uncertain given substantial policy differences and a limited legislative calendar after the elections. But why might this matter for markets? Well, first, it's worth considering the scale of the energy challenge. My colleague Stephen Byrd and his team recently updated their projections for the U.S. data center power shortfall. They now see a potential 57-gigawatt gap through 2028, and that's before accounting for new solutions that could accelerate access to power. That's up from their previous estimate of 38-gigawatts. And that's why the permitting proposal is so important. There are two elements that I'd highlight. First is the effort to accelerate infrastructure development. The bill would reform federal environmental reviews and provide greater certainty for projects that have already received approvals. We think that can help reduce delays and uncertainty around new energy projects, although permitting reform alone won't resolve constraints involving equipment, labor, or grid capacity. The second element is the growing focus on who pays for the infrastructure, and here the proposal actually builds on an existing policy initiative. Earlier this year, a number of hyperscalers signed on to the Ratepayer Protection Pledge. That's a voluntary agreement under which companies commit to securing the electricity needed for their data centers and pay for associated power infrastructure upgrades rather than passing the costs on to residential consumers. The pledge was subsequently expanded to include a broader group of utilities, developers, and state participants. Now, what's different about the permitting reform bill is its potential shift from voluntary commitments toward federal requirements. In particular, the proposal would require data centers to cover their associated transmission costs. That's an area where we think policymakers from both parties appear to share concerns about electricity affordability, even though they may disagree over the broader approach to energy policy.Looking beyond the elections, we think that creates two related policy catalysts for investors to watch. The first is whether Congress can reach an agreement on permitting reform that helps accelerate the construction of energy infrastructure. And second, whether lawmakers move to establish a more formal cost-sharing requirement for data centers. The eventual policy mix, we think, could influence both the timing and the economics of new projects. Faster approvals could make some investments more attractive. But requiring developers to absorb additional transmission costs could also change where projects are built and which power solutions they pursue. A changing policy framework could also reinforce the importance of alternatives. Of course, legislation is far from guaranteed. The elections will shape the political environment in which these negotiations continue, and any final agreement could differ substantially from the current proposal. But stepping back, I think there's a broader takeaway. For much of the AI investment cycle, the focus has been on the pace of technological innovation and capital spending. Increasingly, though, policy decisions around electricity infrastructure, permitting, and affordability could become just as important in determining how quickly that investment translates into operational capacity. The permitting bill is an early indication of how D.C. may approach those challenges after the elections. And for investors, the central question may be less about how much ...
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    5 min
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