MW Here are the macro surprises that Morgan Stanley says could trip up investors next year
By Jules Rimmer
Morgan Stanley's top surprises for 2026 include a bull flattening of the U.S Treasury yield curve and a volatility shock at some point.
Morgan Stanley compiled a list of potential surprises that could wrongfoot investors in 2026.
The global strategy team, led by Matthew Hornbach, published a research note Friday identified possible developments not currently incorporated into consensus thinking.
First among them would be a jobless productivity boost in the U.S., perhaps resulting from increased adoption of AI technology, thereby reducing consumer price inflation. Hornbach considers the possibility of a cooling in labor demand keeping wage growth around 3.5% while productivity growth accelerates from 2 to 2.5%.
This might push core inflation below 2%, Hornbach suggests, making it easier for the Fed to lower rates and make for a bull-flattening of the yield curve, whereby longer-term rates BX:TMUBMUSD30Y fall more rapidly than the short end BX:TMUBMUSD02Y . Investors might worry less about deficit growth and term premia - the greater returns demanded for tying up capital in longer duration assets.
Eli Carter and Martin Tobias suggest that a reversion to negative equity- bond correlations could confound expectations in 2026. This year while equities have rallied, so have bonds as the yield on the U.S. 10-year Treasury BX:TMUBMUSD10Y has dropped 40 basis points. They can imagine a scenario wherein bad news becomes bad news once more for risky assets, whereas at present, they tend to rally because they imply more encouragement for the Fed to cut rates.
Given that VIX VIX, the benchmark measure of volatility / investor anxiety, is trading near recent lows and in a relatively narrow band, Shaun Zhoul and Eli Carter reckon any outsized move or major event could trigger a significant volatility shock. The market is pricing a very tight distribution for future volatility, they observe. "Implied volatility is at excessively low levels."
Market implies a more concentrated distribution for 10y rate and doesn't factor in much probability of left-field events hitting the markets
Japanese fixed-income analysts Koici Sugasaki and Hiromu Uezato identify a reluctance on behalf of domestic investors to support the Japanese government bond market BX:TMBMKJP-10Y as their chief concern. They worry higher rates imposed by the Bank of Japan might have the opposite effect of that intended and actually reduce the buying appetite of domestic investors.
London-based analyst David Adams considers a stronger euro, resulting from much more enthusiastic take-up of AI technology as a potential outlier. This is possible, especially if it causes the euro (EURUSD) to rise because the European Central Bank Is not expected to tighten at all in 2026.
Currency analysts Andrew Watrous and Molly Nickolin fancy the Canadian dollar (CADUSD) may eventually catch up with the broader G10 move upwards against the dollar having lagged so far since the dollar's retreat began in January.
Finally, emerging market analysts James Lord and Simon Waever conjecture that fixed-income returns in their space could see another year of powerful returns like the 14% to 16% delivered in 2025 EMB . If the Fed cuts rates below what is considered neutral (somewhere around 3%) and inflation is benign, then a positive case for emerging market bonds could be made with some spread tightening relative to the U.S. and a lower policy rate from the Fed.
-Jules Rimmer
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December 22, 2025 07:27 ET (12:27 GMT)
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