Our ABS Strategist Carolyn Campbell explains how rising borrowing costs are slowing the AI data center boom and what could drive a rebound in financing.

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Carolyn Campbell: Welcome to Thoughts on the Market. I'm Carolyn Campbell, Morgan Stanley's Asset-Backed Securities Strategist.

Today, why the AI boom is running into an unexpected obstacle: the cost of borrowing money.

It's Friday, October 16th, at 10am in New York.

Demand for data center facilities is booming. Yet even as companies race to build more capacity, the financing for them is becoming increasingly expensive. And that tension is creating an interesting story in credit markets.

Since January, five-year Treasury rates have climbed more than one percentage point, and spreads for data center assets have also gone wider. At the beginning of 2026, the highest-rated data center bonds offered yields below 5 percent. Today, similar bonds are yielding closer to 7 percent, and that increase matters enormously for companies trying to finance multi-billion-dollar facilities.

Many operators turn to the securitized credit markets to raise money. Essentially, they issue bonds backed by the income generated by their data centers. By the time these bonds are issued, construction on the data center is complete, the power is secured, and the rent is already being paid.

So, on the one hand, cash flows are stabilized – but there is a catch. These facilities often sign long-term leases well before they seek financing in the securitized credit market.

By the time they're ready to issue these bonds, rental income is already locked in. And so, when interest rates rise quickly, as we've seen this year, and these borrowing costs increase, revenues aren't necessarily keeping pace.

Our analysis suggests that when borrowing costs approach 8 percent, issuing these bonds becomes significantly more challenging under these current financing terms. And we're already seeing the effects in the market.

So far in 2026, data center operators have issued around [$] 15 billion in ABS and another [$] 7 billion in the CMBS markets. That's roughly in line with last year's pace, but it's below what we'd expect given the extraordinary growth in data center demand this year. Still, we believe the slowdown in supply is temporary.

Our forecast suggests that U.S. data center power capacity could grow from roughly 60 gigawatts today to 150 gigawatts by 2028; although there are some constraints on power availability that could leave capacity 30 percent to 40 percent below these projections.

Regardless, much of the lease capacity that comes online will require debt financing, and these operators have ambitious growth plans. So, they have some options to navigate these higher rate environments.

They might borrow less against their properties. They might accept lower investment returns in the near term. Or they can turn to different credit channels that offer more flexible financing structures.

So, where does this leave the market? To take into account the higher rate environment, we've lowered our forecast slightly for 2026 and 2027 for securitized credit data center issuance. But the amount of lease capacity that's set to come online in 2028 is so high that we've actually held those numbers steady.

All told, we now expect around a [$] 120 to a [$] 150 billion of supply over the next couple of years. That's substantial financing activity, even with the higher interest rates creating near-term challenges.

The higher cost of borrowing may slow the pace of data center financing for now, but the scale of the build-out ahead suggests that this market still has plenty of room to grow. And there are pockets within the market that we do like.

We've talked a lot about the hyperscaler data centers, which are big campuses leased to one or two hyperscaler tenants, often with 10- or 15-year leases.

But the other part of the market, the colocation data center market, is where we see a lot of value today. These campuses have many different types of tenants, many different industries represented, and they often have shorter leases.

Given the sharp increase in data center rental rates and vacancy rates around 1 percent, these data center operators are more quickly able to monetize the changes that we're seeing in the industry.

That flexibility could prove particularly valuable when borrowing costs remain elevated.

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Our Chief Latin America Equity Strategist Nikolaj Lippmann explains why Brazil’s election, the cost of capital, AI investment and geopolitics could help unlock a new era of growth across Latin America.

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Welcome to Thoughts on the Market. I'm Nikolaj Lippmann, Morgan Stanley's Chief Latin America Equity Strategist.

Today – why Brazil could be the missing piece of what we call LatAm Spring, and what AI has to do with it.

It’s Thursday, October 15th, at 10am in New York.

Brazilian equities rallied sharply last week after a surprising first-round presidential election result. Flávio Bolsonaro finished ahead of President Lula, setting up a runoff later this month. The outcome remains uncertain. But for investors, I think there’s a bigger question. Can Brazil approach a policy shift that unlocks something the country has lacked for years: investment.

We've long argued that Latin America is moving from a consumption-led economy towards an investment-led cycle, thanks to: 1. Changing geopolitics; 2. investment-friendly policies; and 3. The potential for lower interest rates. What's more, this fits into the framework of the AI CapEx cycle, driving the global and especially the U.S. economy that has moved from consumption to CapEx, as argued by Mike Gapen, our U.S. economist. We're already seeing signs of this LatAm Spring in Argentina, Chile, Peru and Colombia. Brazil could be the largest missing piece. And there are three reasons why.

First, the cost of capital. Brazil remains one of the world's most expensive places to invest. High government debt and elevated interest rates have made fixed income investment more attractive than equities or entrepreneurial risk-taking. But credible fiscal reform could change that equation. Lower government spending could reduce borrowing costs, strengthen the currency, and encourage private investment. Which means capital could shift from sitting in fixed-income assets toward funding growth.

Second, AI. AI might seem unrelated to Brazilian politics, but we see an important connection. Our global framework suggests that annual capital spending could rise from roughly $2.5 trillion to about $5 trillion - $6 trillion as companies build out global AI infrastructure. And Latin America has a critical role to play.

Data centers need electricity. Electricity requires energy infrastructure. And the infrastructure requires copper, lithium, and other critical minerals. Latin America as a whole supplies roughly 10 percent of the world's energy, holds about 20 percent of global energy reserves, about 30 percent of global copper, and approximately 60 percent of the world's lithium resources.

So, we've argued that Brazil and Argentina look increasingly like Texas, with exports of energy and of agriculture. And one other area around politics where Brazilians could perhaps learn or be inspired from peer Latin American countries and gather some inspiration from Texas could be around deregulation.

For Brazil, lower interest rates and greater policy credibility could make participating in this investment boom considerably easier.

And that brings me to the third factor: geopolitics. Brazil has strengthened its economic ties with the East, while remaining deeply connected to Western capital markets and U.S. technology. A more balanced relationship could improve access to capital markets and support long-term investments. Of course, an election result alone doesn't guarantee change. Fiscal discipline, policy execution, and global financing conditions remain critical. Higher U.S. Treasury yields are an especially important risk for a region carrying substantial debt.

But consider what's already happening elsewhere. Mexico contributes hardware to the AI supply chain. Chile is rebuilding its investment pipeline. And Peru is benefiting from mining activity. Argentina is attracting capital after significant policy changes.

As Latin America's largest economy, Brazil could have substantial regional implications if it moves in the same direction. That's ultimately our LatAm Spring thesis: a shift away from consumption toward investment, entrepreneurship, and capital formation.

There's still a long road ahead, but Brazil could be the most important test of whether that spring truly takes hold.

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