Dec. 26 (Bloomberg) -- Pacific Investment Management Co., the largest U.S. bond manager, lifted investment limits for its Pimco High Income closed-end fund to allow its managers to expand the use of swaps and other derivatives. Pimco High Income is removing a 20 percent restriction on illiquid debt and a 25 percent cap on derivatives, Allianz Global Investors Fund Management LLC, the fund’s owner, said in a statement today. Newport Beach, California-based Pimco is subadviser to the fund. The fund, with an asset value of $636 million, last month delayed scheduled dividend payments as it fell below a required assets-to-borrowing ratio. It can now expand its investments in credit- default swaps, contracts conceived to shield investors against default. The cost of agreements to protect holders of U.S. corporate bonds rose to a record this month as investors shunned all but the safest government-backed debt. “The removal of these restrictions provides additional investment flexibility to respond to changing market conditions,” Allianz said in today’s statement. Closed-end funds issue a fixed number of common shares that trade on an exchange like stocks. Their share prices can trade at a premium or discount to the underlying value of the fund’s holdings. Most closed-end funds try to boost returns for common shareholders through leverage by selling debt or preferred shares. Pimco High Income, managed by Mark Hudoff, invests in high- yield corporate debt. The fund declined 12 cents, or 2.2 percent, to $5.41 a share at 12:14 p.m. in New York Stock Exchange composite trading. Its shares have dropped 47 percent this year, including reinvested dividends. Setbacks Pimco High Income last month suspended dividend payments that would have been payable in November and December. A dividend of about 24 cents a share is scheduled to be paid on Jan. 2, consisting of the amounts that would have been declared in the two months, according to a Dec. 19 statement by Pimco. Closed-end funds have suffered a series of setbacks this year that pushed share prices to record lows. In February, the $330 billion auction- rate market collapsed, eliminating a source of financing and leaving holders of preferred shares unable to sell. Since then, plunging debt prices have pushed up the cost of borrowing and reduced asset values. Under credit-default swaps, the buyers are paid face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. Pimco is a unit of Munich-based insurer Allianz SE. Pimco manages $790 billion in assets.