Dec. 31 (Bloomberg) -- Pacific Investment Management Co., which runs the world’s largest bond fund, said it is postponing two dividend payments to investors in a pair of closed-end municipal bond funds.

Proceeds from the Pimco Municipal Income Fund and the Pimco New York Municipal Income Fund II were due today and on Feb. 2, Newport Beach, California-based Pimco said in a statement.

“The funds intend to resume paying and declaring dividends as soon as possible,” the company said. Pimco said continuing problems in the capital market caused the values of the funds’ portfolios to decline and led to its decision.

Auction-rate preferred shares, with which the funds borrowed money to boost returns, must be backed by underlying assets worth at least 200 percent, the company said. When that threshold was missed, dividends couldn’t be paid.

The funds may redeem some of the auction-rate shares so dividends may resume, Pimco said. Shares in the funds are sold to investors and are exchange traded.

The Pimco Municipal Income Fund was to pay an 81 cent dividend, the company said. Its total return is down 42 percent year this year while its peers are off an average of 22.09 percent, according to Bloomberg data. The New York Municipal Income Fund II was to pay a 6 cent dividend. Its total return is down 45.92 percent this year, while the peer group has declined an average 22.05 percent, Bloomberg data shows.

Multiyear Returns

The Municipal Income Fund was down for the three- and five- year period 16.91 percent and 4.92 percent, respectively. The New York fund was down 20.36 percent for the three-year period, and 7.66 percent over five years.

John Cummings, an executive vice president, has taken over management of the funds, Pimco said in a Dec. 10 press release distributed by Globe Newswire.

Calls to Cummings and a Pimco spokesman for comment weren’t immediately returned.

Municipal bonds are headed for their first annual loss since 1999. The total return on municipal bonds was negative 4.64 percent as of yesterday, according to a Merrill Lynch & Co. index. The last time the index fell was 1999, when it dropped 6.3 percent.

Pimco previously said it would redeem preferred shares from six closed-end municipal funds that lost as much as 60 percent this year. Those funds are the Pimco New York Municipal Income, Municipal Income Fund II, California Municipal Income Fund II, Municipal California Municipal Income Fund II, Municipal Income Fund III, California Municipal Income Fund III and New York Municipal Income Fund III.

Pimco is a unit of Munich-based Allianz SE.

To contact the reporter on this story: Adam L. Cataldo in New York at acataldo@bloomberg.net.

Last Updated: December 31, 2008 15:17 EST