Pimco is warning fixed-income investors to stay away from lower-quality credit, but sees plenty of opportunities in high-quality assets. The global asset manager, which has $2.27 trillion in assets under management, said in its 2026 outlook that the “credit loss cycle is upon us.” “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,” said the report, authored by global economic advisor Richard Clarida, chief investment officer of global fixed income Andrew Balls and chief investment officer Dan Ivascyn. “We view this as the beginning of a secular trend where quality and credit selection will matter more than ever,” Pimco said. The greater dispersion in returns across asset classes and in the global economy will be driven by geopolitics, domestic politics and industrial policy — namely the massive artificial intelligence buildout, rising defense spending and energy investments, they said. Less reward Still, credit spreads remain tight across the bond market, including in high-yield and private credit. When credit spreads are tight, investors get less reward for taking on more credit risk. Pimco doesn’t view that as a sign of strength, but rather complacency. “The cost of complacency has surged,” the report said. “Investors can no longer rely on outdated assumptions about globalization, policy backstops and suppressed volatility.” The firm believes investors can build resilient portfolios without reaching for risk. Opportunities “remain abundant” thanks to the generational reset in bond yields that began a few years ago, the team said. “High quality fixed income may once again offer income levels competitive with long-run equity returns, with materially lower volatility and strong potential across a variety of scenarios, particularly in a downturn,” wrote Clarida, Balls and Ivascyn. In addition, bonds can be a ballast during “risk-off” episodes in financial markets, they said. ‘High-conviction opportunities’ Pimco sees a few areas presenting “high-conviction opportunities.” First, it likes intermediate-term bonds for their attractive balance of yield and risk, as well as roll-down, which is when the bond ages and rolls down the yield curve. “The five- to 10-year segment of global yield curves looks well compensated relative to both shorter-dated cash and the long end, where fiscal dynamics and term premium uncertainty argue for caution,” the team said. Agency mortgage-backed securities also stand out to Pimco thanks to their spreads, which remain wide relative to history, as well as their high credit quality and improving supply/demand dynamics. “[T]his combination can offer an attractive source of income and diversification,” Clarida, Balls and Ivascyn wrote. PMBS YTD mountain PIMCO Mortgage-Backed Securities Active ETF year to date Agency MBS are debt obligations issued by agencies such as Fannie Mae, Freddie Mac and Ginnie Mae whose cash flows are tied to the interest and payment on a pool of mortgage loans. They have low credit risk because they are backed by the U.S. government. In addition, Pimco likes global government bonds as monetary paths diverge across countries. The bonds can provide diversification and strengthen risk-adjusted returns over time, the team said. They see opportunities for active country selection, including those in emerging markets with credible policies and strong fundamentals, and curve positioning that was largely absent in the era of synchronized global easing of interest rates. PAEMX YTD mountain PIMCO Emerging Markets Bond Fund year to date Lastly, inflation-linked bonds and a selection of real assets can play an important role in the portfolio. “With inflation tails fatter and geopolitical risks to energy elevated, real (inflation-adjusted) yields that are positive by historical standards can help provide a meaningful buffer to volatility.” Pimco said. “Gold, in particular, has continued to serve as a neutral store of value in a world of partial confidence in fiat currencies.”