U.S. Securities and Exchange Commission Mid-Year Outlook: Bullish on Non-QM and CMBS, Cautious About CLO and AI Risks

Overview

This report presents Morgan Stanley’s mid‑2026 outlook for the U.S. securitized credit market. The key takeaway is that, amid banking deregulation and a high‑interest‑rate environment, performance across sub‑sectors remains divergent. The firm remains bullish on non‑qualified mortgage (Non‑QM) RMBS, commercial mortgage‑backed securities (CMBS), and asset‑backed securities (ABS) tied to digital infrastructure, citing favorable relative valuations and supportive supply‑and‑demand dynamics. At the same time, the report notes that the housing market continues to languish due to affordability constraints, while the disruptive impact of artificial intelligence (AI) could pose refinancing challenges for software‑related borrowers in collateralized loan obligations (CLOs). Accordingly, investors are advised to exercise caution in the CLO space and favor higher‑grade tranches.

Core views

Macroeconomics and the Housing Market: Despite the 10-year U.S. Treasury yield remaining above 4.15%, which is expected to push 30-year mortgage rates to around 6.25% by the end of 2026 and approximately 6.125% by the end of 2027, housing affordability remains near multi-decade lows. With inventory growth outpacing demand, nationwide home price growth has decelerated to nearly zero year-over-year; however, constrained listing inventories make substantial declines unlikely, with prices projected to rebound to +2% by late 2026 and sustain that level in 2027. Existing-home sales are stuck at low turnover rates, while new-home prices, weighed down by elevated inventory levels, have even fallen below existing‑home prices—a first since records began. Residential Mortgage-Backed Securities (RMBS): Non‑agency RMBS issuance remains robust, with full-year 2026 issuance expected to hit a record $235 billion, driven primarily by Non‑QMs and second-lien/HELOC products. Although the share of Non‑QMs has risen, their recent delinquency rates have increased more slowly than in 2023, suggesting that underwriting standards have not significantly loosened. Against a backdrop of deregulation, easing capital constraints on banks, and insurers’ appetite for higher yields, Non‑QMs continue to offer attractive risk‑adjusted returns across the capital structure—particularly AAA tranches, whose spreads remain compelling relative to agency MBS. Commercial Real Estate Mortgage-Backed Securities (CMBS): The CRE fundamentals are recovering, with transaction volumes up 27% year over year and distressed flows turning negative. The report revises down its 2026 non‑agency CMBS supply forecast to $175 billion, with single‑asset, single‑borrower (SASB) transactions likely replacing conduit structures as the dominant deal type. Despite headwinds from elevated interest rates on refinancing, CMBS are expected to outperform corporate bonds thanks to more favorable supply‑demand dynamics. Particular optimism is directed toward newly issued SASBs and senior tranches of CRE CLOs, alongside relative value opportunities arising from exposure to data centers. Collateralized Loan Obligations (CLOs): The CLO market faces competing forces. On one hand, Basel III final rules and favorable NAIC treatment bolster demand for senior investment-grade tranches; on the other, AI-driven disruptions could expose B‑rated software companies to refinancing challenges and downgrade pressures by 2028. The report lowers its 2026 new‑issue forecast to $180 billion and anticipates a steepening of the credit curve. Strategically, preference is given to the senior layers of the capital structure (e.g., AAA), while equity tranches warrant caution. Although syndicated loan–backed CLOs generally outperform private‑credit–backed CLOs, selective buying opportunities emerge when AAA‑rated PC CLO spreads widen to over 40 basis points. Asset-Backed Securities (ABS): Total ABS issuance in 2026 is projected to reach a record $440 billion. In the digital infrastructure space, data center and fiber‑optic ABS offerings present attractive relative value, particularly BBB‑rated data center securities and BB‑rated fiber‑optic assets. On the consumer ABS front, amid persistent inflation and weaker-than-expected tax rebates, caution prevails toward subprime borrowers, with a stronger preference for prime, AAA‑rated assets. While auto loan delinquency rates have edged higher, they align with seasonal patterns and remain below expectations.

Analysis framework

The report employs an analytical framework that combines top-down and bottom-up approaches. First, starting with the macroeconomic and policy environment, it examines how the Federal Reserve’s interest-rate trajectory, inflation expectations, and banking regulatory policies—such as the final rules under Basel III—affect banks’ capital positions and investment capacity, thereby deriving implications for demand-side dynamics in securitized assets. Second, the analysis delves into the fundamentals of each asset class. For the residential mortgage market, it assesses affordability metrics, inventory levels, and home-price trends to gauge the quality of RMBS underlying assets; for commercial real estate (CRE), it evaluates transaction volumes, distress‑related cash flows, and leasing fundamentals to infer credit‑risk trajectories in CMBS; and for collateralized loan obligations (CLOs), it focuses on the industry mix of the underlying borrowers—particularly the software sector, which is increasingly impacted by AI—and refinancing risks. Finally, a relative‑value assessment is conducted using supply‑and‑demand technicals. The report compares yield spreads across asset classes, projects issuance volumes, and analyzes investor allocations—including flows from banks, insurers, and ETF investors—to formulate specific positioning recommendations, such as overweighting Non‑QM and CMBS while underweighting CLO equity.

Methodology notes

• Macroeconomic frameworkOthers

  The Impact of Regulatory Policies on Bank Capital

  The report notes that the 2026 Basel Accord final proposal has unlocked excess capital previously held by banks to meet the 2023 requirements, thereby enhancing their capacity to increase net investments in securities. This underscores how macroprudential policies can directly reshape financial institutions’ balance-sheet constraints, subsequently influencing demand for specific asset classes, such as securitized credit.

• Industry/ Sector Analysis FrameworkSupply-and-Demand Framework

  Analysis of the Supply-Demand Balance in Securitized Credit

  The report provides a detailed forecast of future issuance volumes (supply) and demand drivers among key investors—such as banks, insurers, and ETFs—across multiple segments, including RMBS, CMBS, CLOs, and ABS. By comparing shifts in supply and demand, it assesses yield spread dynamics and relative value—a core pricing framework in fixed-income research.

• Fixed Income and Credit AnalysisSpread analysis

  Credit Spreads and Relative Value

  The report makes extensive use of basis points (bps) to quantify yield spreads across various securitization products—such as Non-QM AAA versus Agency MBS, and PC CLOs versus BSL CLOs. By leveraging historical percentile comparisons and scenario analysis, it identifies assets that are undervalued or overvalued, thereby informing portfolio allocation decisions.

• Event-Based Game Theory and Behavioral FinanceEvent-driven analysis

  AI Disruption and Its Credit Impact on Specific Industries

  The report treats the transformative impact of AI technology as a discrete credit event, assessing its potential adverse effects on the refinancing capacity of B-rated software companies. This analytical approach focuses on how specific external shocks can alter the cash‑flow stability and default probabilities of underlying assets, representing a quintessential event‑driven credit risk assessment.

Key data

• 2026 Non-Agency RMBS Issuance ForecastUS$235 billionAt a record high, up 13% from 2025 levels.
• 2026 U.S. Home Price Growth Forecast+2%Stabilization by the end of 2026, with continued stability in 2027.
• 2026 Non-Institutional CMBS Issuance ForecastUS$175 billionThe downward revision from previous forecasts reflects changes in the macroeconomic environment.
• 2026 CLO New Issuance ForecastUSD 180 billionAmong them, BSL stands at RMB 140 billion, and PC at RMB 40 billion.
• 2026 ABS Total Issuance ForecastUS$440 billionReaching a record high, including 290 billion for consumers and 150 billion for commerce.
• 30-Year Mortgage Rate Forecast~6.25% (end of 2026)By the end of 2027, it is expected to decline to approximately 6.125%.

Impact & implications

For investors, this implies that, under the current macroeconomic environment, the securitized credit market presents structural alpha opportunities. 1. **Allocation Strategy**: We recommend increasing allocations to Non-QM RMBS and CMBS, particularly in the senior tranches, to capture stable coupon income and potential yield compression gains. Digital infrastructure ABS—such as those backed by data centers or fiber‑optic assets—also represent promising areas for incremental exposure. 2. **Risk Management**: In the CLO space, avoid excessive exposure to equity tranches and lower‑rated subordinated layers, especially portfolios where the underlying assets include a significant share of software companies vulnerable to AI‑related disruptions. Within consumer ABS, steer clear of subprime loans and shift toward higher‑quality, prime‑grade receivables. 3. **Market Dynamics**: The capital release resulting from banking deregulation constitutes a key long‑term tailwind, likely continuing to underpin demand for securitized assets. Particularly in an environment of persistently elevated interest rates, the premium offered by these instruments becomes even more attractive.

Risks

• Prolonged high interest rates, exceeding market expectations, are further weighing on housing sales and CRE refinancing.
• AI-driven disruption has led to a sharp increase in default rates among software-sector borrowers, putting pressure on the underlying assets of CLOs.
• Macroeconomic recession has led to a rise in the unemployment rate, which in turn has triggered a sharp increase in defaults on consumer credit, such as auto loans and credit cards.
• Geopolitical uncertainty has intensified market volatility.

What to watch

• The Federal Reserve’s Monetary Policy Path and the Timing of Rate Cuts
• Housing Inventory Levels and Housing Price Trends
• Trends in CRE Distress Flows
• Refinancing Progress and Rating Changes of CLO-Underlying Borrowers
• The final implementation of the new bank capital regulations and their impact on investment behavior