Pimco warns credit loss cycle has begun as AI spending widens economic divergence and threatens lower-quality leveraged and private credit borrowers

Pimco (Pacific Investment Management Co.), one of the world's largest fixed income managers, has warned that the credit loss cycle is now underway, with its senior investment team — Richard Clarida, Andrew Balls, and Daniel Ivascyn — stating in the firm's latest annual secular outlook that 'the default cycle is reasserting itself.' The firm expects 'significantly higher losses in lower-quality credit such as leveraged and private direct lending.' The trigger, in Pimco's analysis, is the concentration of heavy AI-related spending among large technology companies, which is widening economic outcomes between well-capitalised and poorly-capitalised borrowers. The firm favours quality bonds as a defensive posture. This warning lands against a backdrop of broader stress already visible in the private credit market. Private credit specialists at Ares, Man Group, and HarbourVest have separately told CNBC that AI is forcing a reckoning for private credit's substantial exposure to the software sector — with Man Group's US direct lending chief estimating that software companies now make up between 20% and 30% of private credit portfolios on average. The emerging consensus is a 'K-shaped' software sector (a divergence where some companies thrive while others decline sharply) rather than a wholesale collapse, but the credit quality bifurcation Pimco identifies is consistent with that picture. For leveraged finance and private credit practices, the combination of a Pimco default warning and visible stress in software-heavy loan books creates immediate advisory demand around covenant management, amendment and extension negotiations, and restructuring mandates.