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.
The PIMCO Short Duration Municipal Bond strategy is designed to be appropriate for investors seeking tax-exempt income. The strategy consists of a diversified portfolio of primarily short duration, high credit quality municipal bonds that carry interest income that is exempt from federal tax and in some cases state tax.
In the municipal bond market, issuer-specific credit analysis is critical. Unlike passive strategies that typically rely solely on a rating agency for credit analysis, PIMCO applies extensive research on each municipal bond we purchase. We believe it is imperative to analyze each issuer, both at purchase and on an ongoing basis, to avoid what we feel are municipalities of deteriorating credit quality in our efforts to protect investors’ capital. Active management not only enables the strategy to invest in only the issuers and securities we endorse, but also allows us to change the portfolio structure should credit conditions change. In addition, active management allows for management of capital gains and losses, working to minimize the tax effect of gains, while harvesting losses when available.