Daniel Ivascyn, the chief investment officer at Pimco, says the first sustained credit default cycle in recent memory has officially started. And here’s the thing: he thinks the losses will be worse than most investors expect.

That warning carries weight. Pimco manages over $2 trillion in assets, making it one of the largest fixed-income shops on the planet.

The quiet stress behind calm spreads

The core of Ivascyn’s argument is a disconnect that should make any credit investor uncomfortable. Credit spreads, the premium investors demand for holding riskier debt instead of Treasuries, remain at historically low levels. On the surface, that looks like confidence. Underneath, it looks like complacency.

Ivascyn pointed to several indicators that paint a less rosy picture. Pimco has flagged elevated shadow default rates and a growing use of payment-in-kind features across corporate lending. Shadow defaults are situations where borrowers restructure or amend loan terms to avoid a technical default, essentially kicking the can down the road without it showing up in official default statistics. Payment-in-kind, or PIK, is when a borrower pays interest with more debt instead of cash.

High-yield default rates over the past year have hovered around the long-run average of roughly 4%, according to Pimco’s own analysis. That number looks benign. Ivascyn’s point is that the number is misleading.

Private credit is the pressure point

A significant portion of Ivascyn’s concern centers on private credit and direct lending, two segments that have ballooned in size since the global financial crisis. Record fundraising in these areas over the past decade-plus created an environment where underwriting standards loosened considerably.

Pimco’s analysts expect direct lending markets to face a wave of defaults driven by those loosened standards. The firms that borrowed during the easy-money era are now operating in a higher-rate environment with tighter margins and less room to maneuver.

In an April 15 interview, Ivascyn said Pimco doesn’t see systemic risks emanating from private credit. The less good news is that he expects a prolonged period of underperformance, with returns coming in below what investors had projected when they allocated to these strategies.

Ivascyn noted that while systemic risks from private credit are not anticipated, the sector faces a phase of underperformance and lower returns than investors had projected.

What this means for investors

Ivascyn’s emphasis on rigorous bottom-up credit analysis as a necessity during late-cycle conditions is a principle that translates directly to crypto lending and DeFi credit markets. The protocols and platforms that survive a tightening cycle will be the ones with disciplined underwriting, not the ones offering the highest yields with the loosest terms.

When the CIO of a $2 trillion asset manager says losses will exceed expectations and that a default cycle is underway, it’s not a prediction you dismiss easily. Credit spreads may look calm today, but the stress indicators Pimco has identified, shadow defaults, PIK usage, weakened underwriting, suggest the calm won’t last.