Pimco warns credit loss cycle is upon us amid AI spending surge

One of the world’s largest bond managers just told investors to buckle up. PIMCO CIO Daniel Ivascyn warned on June 4 that a sustained credit default cycle has officially begun, with losses expected to climb well above the unusually low levels that markets have enjoyed in recent years.

The culprit, according to PIMCO’s analysis: a massive wave of AI-related capital spending that is pressuring the balance sheets of lower-quality borrowers and eroding free cash flow across the sector.

The AI debt machine is running hot

PIMCO’s own data pegs AI-related debt issuance at roughly $100 billion per quarter. Hyperscale operators, the companies running the massive data centers that power AI workloads, are increasingly financing their buildouts with leverage rather than cash on hand.

PIMCO’s May 2026 report, titled “AI Credit Expansion,” laid out the dynamic in detail. Capital expenditure is surging while free cash flow is heading in the opposite direction. The report does note that today’s AI-driven financing cycle is more disciplined than historical parallels like the early-2000s telecom boom, when companies borrowed recklessly to lay fiber optic cable that went largely unused.

PIMCO is playing both sides

What makes Ivascyn’s warning particularly interesting is that PIMCO isn’t just observing this cycle from the sidelines. In October 2025, PIMCO closed a record $27 billion private-debt package to finance Meta’s Hyperion AI data center. That single deal generated approximately $2 billion in paper profits for the firm.

PIMCO’s view is that the opportunity set in AI-related credit is real, but only for investors who can distinguish between well-capitalized borrowers with genuine revenue trajectories and overleveraged operators chasing a hype cycle.

Late-cycle stress signals are flashing

Ivascyn’s warning didn’t emerge in a vacuum. PIMCO’s analysis points to emerging late-cycle stress signals in the direct lending market, the corner of private credit where non-bank lenders provide financing to mid-market companies. Earlier in March, the firm had highlighted troubling late-cycle conditions marked by increased shadow default rates and a shift toward payment-in-kind features in direct lending—issues exacerbated by AI-related industry disruptions and escalating energy costs.

What this means for investors

For traditional credit investors, Ivascyn’s message is straightforward. The era of minimal losses is ending. The risk is especially acute for portfolios with heavy exposure to lower-rated borrowers. Investment-grade credits backed by companies with strong cash generation will likely weather the cycle without much drama. But high-yield and leveraged loan portfolios, particularly those with AI-sector concentration, face a more precarious path.

Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.