Morgan Stanley sees AI data center credit spreads widening further

Investing.com -- Morgan Stanley analysts said they expect spreads across asset-backed securities tied to artificial intelligence and data center financing to soften after corporate credit spreads widened over the past six weeks.

The bank noted that $360 billion in global fixed income supply year-to-date pushed AI and data center-related corporate credit spreads wider. Investment grade-rated data center secured bonds widened by 40 basis points since mid-June, while high-yield counterparts sold off 120 basis points during the same period.

The asset-backed securities market has shown limited reaction so far. Pricings in July remained largely stable despite weakness in corporate credit, particularly for senior tranches. Secondary market spreads drifted only slightly wider.

Morgan Stanley attributed the ABS market's stability to several factors. The securitized credit market already priced in elevated supply expectations, and the illiquid secondary market makes price discovery difficult. Total ABS and commercial mortgage-backed securities issuance of $18 billion, representing 64% of fiscal 2025 supply, appears modest compared to corporate credit where issuance already exceeded fiscal 2025 volumes.

The bank noted that assets underlying ABS and CMBS deals are fully stabilized, which may reduce volatility related to political pushback and construction risk.

Morgan Stanley said it prefers BBB-rated securities for their relative value and views compute as structurally undersupplied over the medium term. The bank would consider buying if ABS spreads widen above 200 basis points on single A-rated securities and above 300 basis points on BBB-rated securities.

The bank also favors colocation over hyperscaler data center ABS as a defensive position amid growing focus on single-name hyperscaler risk.

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