Private lending frenzy receives warning, PIMCO chief: institutions "snatching loans" from low-quality enterprises, liquidity feast may hide pitfalls.

The Chief Investment Officer of one of the world's largest bond fund companies issued a warning that the credit markets are making dangerous assumptions, with inflated ratings potentially giving investors a false sense of security when the Federal Reserve's ability to intervene is limited. Dan Ivascyn, Chief Investment Officer of Pacific Investment Management Company (PIMCO), pointed out, "Just because a rating agency gives an asset an investment grade rating and assumes it is investment grade, it's very, very dangerous. The growth of loans to low-quality companies is currently increasing rapidly. I must emphasize again, the last major cycle was lending to lower-quality families." At the time of Ivascyn's warning, private credit has rapidly expanded as various funds compete to take over the lending 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. Ivascyn stated that this brings to mind the complacency in the credit market before the financial crisis. However, he also noted that this shift is creating an exciting environment for active investors, including "aggressive underwriting, wider risk premiums, and reduced central bank intervention space". Ivascyn stated, "We are moving towards an environment where the market increasingly needs to stand on its own, based on fundamentals. And that's an exciting time. This means more risk premiums, more term premiums, higher yields (with significant valuation buffer space, either absolutely or relative to what appear to be fairly expensive stocks), and lower correlations in the market." The issue of ratings in the booming private credit market has been under scrutiny before. The US Securities and Exchange Commission (SEC) is investigating one of the most active rating agencies in the field, Egencia-Jones Ratings Agency. Meanwhile, the Bank for International Settlements wrote in a report earlier this year that the influx of funds into private credit, especially from insurance companies, "might lead to overvalued assessments of credit value and corresponding risks of capital inadequacy". Ivascyn stated, "Today, you often see an entity getting an investment grade rating. Participants in the market have been joking for years that if you can only find one investment grade rating, you can just assume all other ratings are below investment grade." He expressed that PIMCO expects the US economy to strengthen in early 2026, thanks to capital investments related to artificial intelligence and the impact of the "big and beautiful bill" under the Trump administration. But he also warned that if economic growth weakens, credit losses could worsen. He added, "If we enter a period of economic weakness, losses will rise, and there may be some disappointments. Regulatory authorities are also reluctant to provide relief to the same industry twice." Ahead of the Federal Reserve's rate decision this week, Ivascyn expects officials to cut rates and "hope to reduce rates a bit further in 2026. Of course, the challenge is that we expect the economy to slightly accelerate in the first half of the year. At the same time, we also expect inflation to remain comfortably above the central bank's target. Therefore, we believe what the Federal Reserve said, that they will continue to monitor the data." Regarding the issue of Federal Reserve independence and the possibility of White House National Economic Council Director and loyal Trump supporter Kevin Hasset being seen as a frontrunner to replace Fed Chair Powell, Ivascyn stated that PIMCO expects "there to be a general spirit of independence. It can be said that the Chair has only one vote, and we have a committee that will continue to focus on the dual mandate. So yes, it is a consideration. It is an input into our decision-making, but not a major concern." It is worth noting that Gregory Peters, Co-Chief Investment Officer of the Fixed Income Department of the global insurance asset management giant PGIM, has expressed similar views previously. He pointed out that even if Hasset is approved to be the next Federal Reserve Chair, he may not be able to achieve the rapid rate cuts that Trump expects. He stated that because the Federal Reserve's rate decisions are ultimately made by the committee, Hasset cannot fulfill this demand on his own. At the time of Ivascyn's latest remarks, PIMCO, a bond management company, had just experienced a solid year. PIMCO's flagship Income Fund, with assets of $213 billion, achieved a return of 10.4% after increasing its holdings of US Treasuries, despite the widespread turmoil in the bond market caused by the Trump administration's comprehensive tariffs. This bond giant also significantly increased its holdings of agency-backed mortgage-backed securities, with Ivascyn stating that they "even on an absolute basis, have very wide spreads relative to corporate bonds".