MW Defaults in debt markets are starting again, warns Pimco. Here's the bond giant's game plan.
By Barbara Kollmeyer
Investors should be getting their portfolios back to that 60/40 balance, says the bond-fund giant
Equity valuations are looking stretched, says Pimco. Investors should be looking to fixed-income for returns.
With defaults set for a comeback and stock-market valuations looking stretched, investors should be turning to fixed income to help anchor portfolios, says bond-fund giant Pimco.
"After years of effortless returns, the default cycle is reasserting itself, and we expect significantly higher losses in lower-quality credit such as leveraged and private direct lending," a team led by former Federal Reserve vice chair Richard Clarida at the $2.27 trillion manager said in a recently published outlook.
Saying the "credit-loss cycle is now upon us," Pimco suggested that credit-ratings-based and liquidity-based financial engineering is speeding up, notably in private-credit markets. That's as credit markets continue to price in a benign outcome. While they don't see a pre-crisis credit bubble of 2005 and 2026 repeating, they suggest steering clear of "lower-quality, economically sensitive corporate credit."
"Even in a strong economy, AI will disrupt old economy companies, especially highly levered ones," Pimco said. Investors can build a high-quality fixed-income portfolio that offers yields of 5% to 7% in local currency terms, with lower volatility than long-run equity returns. Their picks include intermediate-duration bonds, agency mortgage-backed securities and global government bonds, inflation-linked bonds and "select real assets."
They suggest investors steer towards asset-based finance and publicly traded credit markets, as credit stress "will lead to considerable opportunities to provide capital solutions to borrowers."
They also see more attractive risk-adjusted opportunities in asset-based finance, such as in equipment finance, consumer lending, residential mortgages, real estate credit, and select infrastructure finance that benefit from as strong collateral and cash flows less directly tied to corporate earnings.
As for stocks, the team doesn't see an "imminent equity correction," but flagged that the Sharpe ratio - a gauge of risk-adjusted returns - indicates high-quality fixed income is now comparing favorably with stocks for the first time in years.
The S&P 500 SPX is up 8% year to date, the iShares iBoxx $ High Yield Corporate Bond ETF HYG and the State Street SPDR Bloomberg High Yield Bond ETF JNK
"This argues for reconsidering portfolio allocations that were shaped during the low-yield, low-volatility decade following the global financial crisis," said the Pimco team. For this reason, investors should reconsider the traditional portfolio that dictates a portfolio balance of 60% stocks and 40% bonds, after they have been leaning heavily into equities for years.
Bonds also provide diversification in a portfolio in case of economic wobbles, such as an inflationary impact from the Iran war. "Central banks have much more room to cut rates in future economic downturns than in the decade before the pandemic, and we expect them to use it."
Artificial intelligence that could add $14 trillion to global capital spending in the next five years may see a productivity payoff that arrives faster and proves more disinflationary than expected by investors, said Pimco.
"Geopolitics, domestic politics, and industrial policy are no longer external forces that occasionally disrupt the economy. They have become central drivers of growth, inflation, market returns, and volatility. For investors, the implication may be not just higher volatility, but also greater dispersion in returns across asset classes," said Pimco.
Pimco said the dollar DXY should remain a dominant global currency, allowing the U.S. more flexibility than other sovereign issuers, and it doesn't see a U.S. fiscal crisis ahead, despite elevated debt and persistent deficits.
-Barbara Kollmeyer
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(END) Dow Jones Newswires
June 13, 2026 08:00 ET (12:00 GMT)
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