The chief investment officer of one of the world's largest bond funds has issued a warning about a "dangerous" assumption in credit markets, stating that inflated ratings may give investors a false sense of security, especially as the Federal Reserve's ability to intervene becomes constrained.

"It's very, very dangerous to assume something is investment-grade just because a rating agency says so," said Dan Ivascyn, CIO of Pimco. "There's been too much lending to lower-quality companies. And, let me reiterate, the last major cycle saw excessive lending to households with weaker credit profiles."

With the rapid expansion of private credit and funds flooding into a market traditionally dominated by banks, some investors are relying more on third-party ratings rather than conducting in-depth credit analysis themselves. Ivascyn noted that this mirrors the complacency seen in credit markets before past crises.

However, he added that this shift also creates an "exciting" environment for active investors, characterized by "aggressive" underwriting, wider risk premiums, and reduced central bank intervention flexibility.

Ivascyn revealed that Pimco expects the U.S. economy to strengthen in early 2026, driven by AI-related capital investments and the Trump administration's tax cuts. But he cautioned that if growth slows, credit losses could rise, potentially leading to disappointing outcomes. Regulators, he noted, would be reluctant to bail out the same sector twice.

Pimco anticipates the Fed may cut rates this week and "hopes to keep rates lower through 2026." However, Ivascyn highlighted the challenge: "We expect some reacceleration in the first half of the year. Inflation will remain notably above the central bank's target. So we take the Fed at its word when it says it will stay data-dependent."

On the topic of Fed independence and speculation about Kevin Hassett as a leading candidate for the next chair, Ivascyn said Pimco expects "the Fed will maintain its independent spirit in principle, as the chair only has one vote. The FOMC will continue focusing on its dual mandate. A leadership change is a factor in our decision-making, but not a primary concern."