Pimco, managing $2.27 trillion in assets, has issued a warning in its 2026 outlook regarding the increasing risks associated with lower-quality credit, predicting a significant rise in defaults particularly in leveraged and private direct lending.
The report, authored by Richard Clarida, Andrew Balls, and Dan Ivascyn, emphasizes that the current market conditions reflect a complacency among investors, as tight credit spreads offer limited rewards for taking on additional risk.
Pimco suggests that the focus should shift towards high-quality fixed-income investments, which may provide competitive income levels compared to equities with lower volatility.
The firm identifies several 'high-conviction opportunities,' including intermediate-term bonds, agency mortgage-backed securities, global government bonds, and inflation-linked bonds, all of which are expected to perform well in the current economic landscape.
They highlight the importance of quality and credit selection in building resilient portfolios, especially in light of geopolitical and domestic political factors influencing market dynamics