Municipal bonds are debt securities issued by or on behalf of state and local governments, their agencies and authorities, and other instrumentalities. The interest income of most municipal issues is exempt from Federal income taxes. Additionally, the interest income of municipal issues of a specific state will generally not be taxable for state income tax purposes for residents of that state. For investors facing higher marginal income tax rates, municipals may offer greater after-tax yields than available from similar maturity taxable debt securities.
Given the tax-adjusted yields available from municipal bonds, PIMCO’s primary investment objective in managing municipal portfolios is to generate and retain a competitive after-tax rate of interest income. A secondary, and important, goal is to generate long-term capital appreciation, consistent with capital preservation.