How This Fund Is Playing the Sweet Spot in Muni Bonds

The fund holds a Puerto Rico Cofina Sales Tax zero-coupon bond that matures in 2051. (Dreamstime)

As a child growing up in Maplewood, N.J., a leafy suburban enclave that’s popular with New York City commuters, David Hammer didn’t see himself as a Wall Street guy.

Unbeknown to Hammer, however, he did have the makings of a municipal bond analyst, trader, and manager. “I always was attracted to both math and politics,” he recalls. “So, finance, with a mix of public policy, is what the muni market is.”

Now 47 years old, Hammer oversees about $72 billion of municipal bond assets under management at Pimco, the fixed-income powerhouse based in Newport Beach, Calif.—up from about $22 billion when he assumed his current duties just over a decade ago.

Hammer and his colleagues work East Coast hours, typically arriving at the office between 5 and 5:30 a.m. local time.

His various duties include helping to manage the $4.4 billion Pimco Municipal Bond fund. The fund, which has an expense ratio of 0.75%, has acquitted itself well against its peers over the past decade, placing in or near the top 20% of its Morningstar category based on one-, three-, five-, and 10-year results. Its annualized 10-year return was recently 2.75%, about half a percentage point above the peer group’s average.

Year to date as of Nov. 21, the fund had returned 3.86%, also in the top quintile.

Although overall muni-bond performance has improved lately, it has lagged behind the broader bond market this year. As of Nov. 18, the Bloomberg Municipal Bond Index had returned 4.13%, trailing the Bloomberg U.S. Aggregate Bond Index’s 6.72%.

Hammer partly attributes that underperformance to weaker flows from retail investors into muni-bond mutual funds. In addition, robust supply of new municipal issues in the first half of 2025 weighed on performance and, he says, “Muni issuers were fearful that the One Big Beautiful Bill would eliminate their ability to issue tax-exempt bonds in the future.”

That didn’t occur, but the supply glut did. Nevertheless, the backdrop for municipals has improved, Hammer says, in part because “supply has slowed down relative to the first half of the year.”

What’s more, the Federal Reserve has slashed short-term interest rates twice this year, another tailwind for bonds overall.

Hammer also expects that slowing economic growth will be helpful for bonds. Under such a scenario, rate cuts by the Fed are more likely.

In the taxable-bond universe, notably high-yield and investment-grade corporate issues, valuations are pricey, as evidenced by tight credit spreads. For municipal bonds, Hammer says, “It depends where you look, but at a high level, valuations are attractive and resilient if the economy was to slow more than expected.”

A well-structured investment-grade muni portfolio with an A rating on average, he says, can yield about 4% tax-free. “You’d have to earn more than 6½% in taxable markets” for a comparable yield, he says.

The interest paid by municipal bonds is exempt from federal taxes and, in some cases, state and local levies as well.

That 6.5% taxable-equivalent yield that Hammer cites is about 150 basis points, or 1.5 percentage points, above corresponding corporate bonds and 2.5 percentage points higher than Treasuries. Meanwhile, the creditworthiness of the muni market overall has been improving, he says.

Hammer does see some warning signs, however, notably “growing risks in some of the lowest-quality portions of the muni market,” which aren’t rated.

After graduating from Columbia High School in Maplewood, Hammer attended Syracuse University where he majored in finance with a concentration in accounting. Not long after he finished college in 2002, Hammer joined Morgan Stanley, initially focusing on the front end of the curve for the municipal bond department. He gradually extended his expertise further out on the curve to longer-term issues.

The financial crisis of 2007-09 enabled him to learn a lot about analyzing distressed muni issues. “I spent a lot of Sundays at work,” he recalls.

In 2012 Hammer joined Pimco. A key mentor there was Joe Deane, a venerable muni manager. Hammer returned to Morgan Stanley in 2014 to run the municipal bond trading desk, then went back to Pimco in 2015 as Deane was getting ready to retire.

Now, a decade later, Hammer views municipal bonds with maturities of 15 to 20 years as the sweet spot. For one thing, the muni yield curve is steeper than the Treasury curve, providing additional yield and the possibility that as those bonds age, or roll down, their prices can increase. The spread between 30-year AAA and 10-year munis was recently 1.39 percentage points, according to Pimco. It’s roughly 60 basis points for Treasuries.

The muni market has roughly 50,000 issuers, and Hammer often eschews what is traditionally thought of as a muni bond issue—say, a town borrowing money to pay for a new police headquarters. Instead, he favors holdings tied to infrastructure, such as utilities, airports, ports, and toll roads, as well as commercial and residential real estate, among many other holdings.

A top sector overweight in the Pimco Municipal Bond fund is tax-exempt mortgage pools backed by Freddie Mac, which fully guarantees the principal and interest.

Another holding in the fund is a Puerto Rico Cofina Sales Tax zero-coupon bond that matures in 2051 and can be called in 2028. The bond was restructured following Puerto Rico’s bankruptcy filing in 2017. The new bond offers less leverage and more protections for investors, according to Pimco. Hammer says he believes that the Puerto Rico sales tax bonds will be refinanced with an investment-grade rating in the next few years.

For Hammer, it’s another piece in a vast mosaic called the municipal bond market that’s engaged him for nearly 25 years.

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