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 influential bond-fund firm

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 at the $2.27 trillion management firm led by Richard Clarida, the former Federal Reserve vice chair, 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.

Particularly concerning is the new chapter of financial engineering that's emerging out of the artificial-intelligence funding race, said Daniel Ivascyn, Pimco's group chief investment officer, in a follow-up press briefing.

Wall Street "got quite creative" in the 1990, and again in the mid-2000s in the run-up to the global financial crisis, he said, adding that a similar playbook is being revived, in which riskier assets and structures are given top AAA ratings that may not hold up as advertised.

"As time passes from the prior crisis, people forget about these sorts of things," Ivascyn said. Overall, this isn't a point of deep concern yet, but he sees an "increased stream of losses" emerging in certain highly leveraged parts of fixed income.

Investors can still 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, according to Pimco's outlook. Its picks include intermediate-duration bonds, agency mortgage-backed securities and global government bonds, inflation-linked bonds and select real assets.

Pimco says the traditional portfolio that dictates a balance of 60% stocks and 40% bonds now warrants attention with equity exposure having drifted higher as a result of the bull market in stocks.

As for stocks, the team doesn't see an "imminent equity correction" but flagged a vanishing U.S. equity risk premium and stretched valuations. It sees high-quality core bonds having the ability to offer equitylike returns but perhaps with less volatility.

The S&P 500 SPX is up more than 8% to date in 2026. Shares of the popular iShares iBoxx $ High Yield Corporate Bond ETF HYG and the State Street SPDR Bloomberg High Yield Bond ETF JNK were slightly negative on the year. That's mainly due to inflation concerns triggered by the Iran war and the sharp selloff in the $30 trillion Treasury market, with investors demanding more yield to lend to the U.S. government. There's hope that an end to the war could ease some of those pressures.

Goldman Sachs strategists this week said they expect U.S. investment-grade corporate bonds to produce a 3.3% total return in 2026 and 4.9% for high yield.

Over a five-year horizon and with higher starting yields, bonds can offer attractive returns for several years to come. That's why Pimco says the traditional portfolio that dictates a balance of 60% stocks and 40% bonds "warrants attention" as equity exposure has "drifted higher" for many investors benefiting from the bull market in stocks.

Furthermore, AI, energy and military spending globally could create a $14 trillion investment "supercycle" in the next five years, while a productivity payoff could arrives faster and prove more disinflationary than expected by investors, said Pimco.

Given the "rupture" in trade, security and financial alliances around the world, the dollar DXY should remain a dominant global currency, allowing the U.S. more flexibility than other sovereign issuers, according to Pimco. The team doesn't see a U.S. fiscal crisis ahead, despite elevated debt and persistent deficits.

Joy Wiltermuth contributed.

-Barbara Kollmeyer

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June 14, 2026 13:34 ET (17:34 GMT)

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