• PIMCO warns that a credit-loss cycle is underway, with defaults expected to rise sharply among lower-quality borrowers, including leveraged loans and private credit companies.
  • The firm says AI-driven disruption could hurt heavily indebted businesses, while current credit markets appear complacent about risks.
  • PIMCO favors intermediate-term government bonds, citing recession risks, persistent uncertainty, and the potential for future central-bank rate cuts.

PIMCO, one of the world's largest fixed-income managers, is sounding the alarm on a coming wave of defaults. In a recent research note, the firm warned that a credit-loss cycle is already underway, with rising defaults expected among lower-quality borrowers. The note highlighted that leveraged loans and private credit companies are particularly vulnerable, as tight funding conditions and slowing growth weigh on their ability to service debt.

According to people familiar with PIMCO's thinking, the firm is increasingly focused on the role of artificial intelligence as a potential catalyst for stress. AI-driven disruption could hammer heavily indebted businesses that fail to adapt, accelerating defaults in sectors like retail, media, and industrials. PIMCO's analysts argue that many of these companies are already struggling with high leverage and weak cash flows, making them susceptible to even minor shocks.

Despite these risks, credit markets appear strangely complacent, according to PIMCO. Spreads on high-yield bonds and leveraged loans remain relatively tight, suggesting investors are not fully pricing in the possibility of a sharp rise in defaults. PIMCO's head of credit research declined to comment, but the firm's public statements have emphasized the need for caution.

In terms of positioning, PIMCO is advocating for intermediate-term government bonds. The firm cites recession risks, ongoing economic uncertainty, and the potential for future central-bank rate cuts as reasons to favor safe-haven assets. This marks a shift from earlier in the year, when PIMCO was more neutral on duration.

Industry experts note that PIMCO's warning aligns with other bearish signals from credit markets. S&P Global Ratings has also projected a rise in default rates, while the Federal Reserve has flagged elevated leverage in the corporate sector. Private credit, in particular, has come under scrutiny, as the asset class has grown rapidly in recent years with little transparency.

A PIMCO spokesperson did not immediately respond to a request for comment. The firm is expected to release a more detailed outlook in its upcoming quarterly report.

Correction: An earlier version of this article misstated the timing of PIMCO's note. It was published on Tuesday, not Wednesday. The text has been corrected.