Pacific Investment Management Co. (Pimco) says the “credit loss cycle is upon us,” warning that conditions could lead to higher losses for lower-quality borrowers. In its latest annual secular outlook, Pimco’s Richard Clarida, Andrew Balls and Daniel Ivascyn argue that the default cycle is “reasserting itself” and that losses are likely to rise in weaker credit, including leveraged and private direct lending.
Pimco links the risk outlook to uncertainty around the broader economic impact of heavy investment in artificial intelligence. The firm says AI spending could widen the range of economic outcomes over the next five years, leaving more highly leveraged borrowers more exposed. It also points to signs of credit strain in certain deal structures, including more instances of maturity extensions and payment-in-kind arrangements that effectively allow borrowers to repay debt with additional debt.
On market conditions, Pimco notes that high-grade corporate credit spreads remain near their lowest levels in decades and that demand for riskier debt has stayed strong despite a recent global bond selloff, which it describes as inconsistent with “elevated secular uncertainty.” The firm frames this as potential complacency rather than strength and says it favors quality bonds.
