Pimco readying a pair of muni bond funds

Investors are plowing cash back into tax-free bonds and Pacific Investment Management Co. is ready to take advantage of investors' renewed enthusiasm.

Investors are plowing cash back into tax-free bonds now that the threat of a municipal bond crisis has passed and Pacific Investment Management Co. LLC is preparing to take advantage of investors’ renewed enthusiasm with two new municipal bond funds, pending approval from the Securities and Exchange Commission. One will be a national intermediate-term municipal bond fund, and the other will focus on California tax-free bonds.
Interest in municipal bond funds has taken off since late August, after being left for dead for most of 2011 as analyst Meredith Whitney’s prediction of mass defaults sent investors fleeing. “Interest is really coming back in a strong way,” said Jeff Tjornehoj, senior research analyst at Lipper Inc. “Investors have been socking away $600 million to $700 million a week in municipal bond funds since late August,” he said.
The increased interest has helped drive performance. “When you have a lot of money coming into an asset class with fairly light issuance, flows can have a pretty strong effect on performance,” Mr. Tjornehoj said.
Over the past year, municipal bond funds have had an average return of 8%, according to Morningstar Inc.
National intermediate-term municipal bond funds have been at the core of the revival in municipal bond fund inflows, Mr. Tjornehoj said.
National municipal bond funds have a better chance to pick up some incremental yield than state specific funds, which could have more tax benefits for individuals in those states. “Right now, investors are willing to make the trade-off for the higher yield,” he said.
Pimco already offers a national intermediate-term municipal bond ETF, the $125 million actively managed Pimco Intermediate Muni Bond Strategy ETF (MUNI).
One major difference between the planned Pimco National Intermediate Bond Fund and the ETF could be the use of derivatives. Pimco was unable to include derivatives in the ETF version of the Pimco Total Return Fund (PTTAX), and it’s something industry watchers are keeping a close eye on to see if it causes a disruption in performance.
Michael Reid, spokesman for Pimco, declined to comment while the funds are in registration with the SEC.