Private credit spree warned PIMCO chief: institutions “grab loans” for low-quality businesses; liquidity feast may be hidden

The Zhitong Finance App learned that the chief investment officer of one of the world's largest bond fund companies issued a warning saying that there are “dangerous” assumptions in the credit market, and that inflated ratings may bring investors a false sense of security at a time when the Federal Reserve's ability to intervene is limited. Dan Evasin, chief investment officer of Pacific Investment Management (PIMCO), stated, “It's very, very dangerous just because a rating agency gives an investment grade rating to an asset and assume that something is investment grade. Currently, loans to low-quality companies are growing so fast. Once again, the last major cycle was lending to credit-quality households.”

When Ivassin issued this warning, the scale of private credit expanded rapidly, and various funds competed for the loan business once dominated by banks. This has led some investors to rely more heavily on third-party ratings rather than conducting in-depth credit analysis. Ivashin said that this is reminiscent of the complacency of the credit market before the financial crisis. However, he also said that this transformation is creating an “exciting” environment for active investors, which includes “aggressive” underwriting, wider risk premiums, and reduced room for central bank intervention.

Ivashin said, “We are returning to an environment where the market increasingly needs to stand on its own feet, based on fundamentals. And this is an exciting time. This means that the market has more risk premiums, more term premiums, higher returns (with significant valuation buffers, both in absolute terms and compared to the stock market, which seems to be quite expensive), and lower correlation.”

This is not the first time that rating issues in the booming private credit market have been scrutinized. The US Securities and Exchange Commission (SEC) is investigating Eagan Jones Ratings, one of the most active rating agencies in the field. Meanwhile, the Bank for International Settlements wrote in a report earlier this year that the influx of private credit funds — particularly from insurance companies — “could lead to an inflated assessment of credit value and a corresponding risk exposure to insufficient capital.”

Ivashin said, “Nowadays, you often see an entity receiving an investment-grade rating. Market participants have been joking for years that if you can only find one investment-grade rating, then it's safe to assume that every other rating is lower than investment-grade.”

He said that PIMCO expects the US economy to strengthen in early 2026, thanks to capital investment related to artificial intelligence and the impact of the Trump administration's “Big and Beautiful Act.” But he also warned that if economic growth weakens, credit losses may increase. He added, “If we enter a period of economic weakness, losses will rise, and it is likely that there will be some disappointing situations at that time. Regulators are also unwilling to bail out the same industry twice.”

Ahead of the Federal Reserve's interest rate decision this week, Ivashin anticipates that officials may cut interest rates and “hopes to lower interest rates a little more in 2026. The challenge, of course, is that we expect the economy to accelerate slightly again in the first half of the year. At the same time, we also expect inflation to easily exceed the central bank's target. So we believe what the Federal Reserve says is that they will continue to keep an eye on the data”.

Regarding the independence of the Federal Reserve and the fact that Kevin Hassett, head of the White House National Economic Council and a loyal supporter of Trump, is seen as a popular candidate to succeed Federal Reserve Chairman Powell, Ivasin said that PIMCO expects “a general spirit of independence there. Arguably, the Chairman has only one vote, and we have a committee that will continue to focus on dual missions. So yeah, that's a factor to consider. It's an input to our decisions, but it's not the main concern”.

It is worth mentioning that Gregory Peters, co-chief investment officer of the fixed income division of global insurance asset management giant PGIM, expressed similar views before. He pointed out that even if Hassett is approved as the next chairman of the Federal Reserve, he may not be able to achieve the rapid pace of interest rate cuts expected by Trump. He said that since the Federal Reserve's interest rate decision is ultimately decided by the committee, Hassett cannot fulfill this demand on his own.

At the time of Ivassin's latest remarks, PIMCO, a bond management company, had just experienced a year of steady performance. PIMCO's $213 billion flagship income fund achieved a return of 10.4% after increasing its holdings of US Treasury bonds, despite the widespread turmoil caused by the Trump administration's comprehensive tariffs in the bond market. The bond giant has also substantially increased its holdings of institutionally-supported mortgage bonds, and Ivassin said its “interest spreads are very wide compared to corporate bonds, even in absolute terms.”