Morgan Stanley Podcast: Andrew Sheets on Credit Cracks Beneath High-Rate Resilience

Morgan Stanley has released a new episode of its 'Thoughts on the Market' podcast featuring Andrew Sheets, the firm's Global Head of Fixed Income Research. Recorded in London on October 9, 2026, the episode centers on when the apparent resilience of markets under high interest rates might give way to substantive rupture risks. For investors focused on macro liquidity and credit cycles, this analysis offers an institutional framework for key observations.

Sheets notes that despite significant yield increases this year, economic growth in the US, Europe, and Asia remains unexpectedly resilient, with inflation still above central bank targets. He argues that current interest rate levels are not clearly 'wrong,' as excessively high rates would typically suppress activity and lower inflation. However, the massive scale of AI-related spending, which is largely insensitive to interest rates, has prevented this traditional transmission mechanism from fully manifesting. Additionally, the absence of an inverted yield curve suggests the market does not view policy rates as overly restrictive.

However, Sheets emphasizes that cracks exist beneath the surface of market 'resilience.' Data shows that spreads for the lowest-rated CCC credit have widened significantly in both the US and Europe, while listed Business Development Companies (BDCs) holding low-rated private credit trade below their book value. Furthermore, even within the overall rising US equity market, more than half of the top 3,000 stocks by market capitalization have fallen at least 20% since June. These signs indicate that while the aggregate economy may withstand high rates, vulnerable segments—such as small, weakly capitalized, or highly leveraged firms—are already feeling the impact.