The world's largest bond fund manager has taken the next step in entering the $593.5 billion exchange-traded funds market.

Pacific Investment Management Co. has filed a prospectus for its first ETF. The move follows a submission to the Securities and Exchange Commission on July 29 for exemptive relief to offer ETFs. (See related story here.)

At the time, PIMCO said it was making plans to offer an ETF that passively tracked the Lehman Brothers U.S. Aggregate Bond Index. The benchmark combines thousands of different issues, ranging from short- to long-term bonds and everything in between. It's perhaps one of the best known of the so-called total bond market indexes on the market.

But in its latest ETF-related filing, the Newport Beach, Calif.-based asset manager has submitted a prospectus for a proposed PIMCO 1-3 Year U.S. Treasury Index Fund.  

Typically, a fund company will request approval to distribute ETFs. Next comes a prospectus of its first specific portfolio, or set of portfolios.

Although PIMCO officials weren't willing to go into specifics late Friday, it's probably a fair guess that recent market liquidity concerns played a role in the apparent change of plans. Bond ETFs were left last month with big gaps between valuations for their underlying securities and net asset values. Corporate fixed-income markets were hit much harder than Treasuries.

The most glaring example came in high-yield issues. The iShares iBoxx Investment Grade (NYSEArca: HYG), for example, after the first week of October was trading at a nearly 28% discount to its NAV. Even investment-grade issues were impacted. The iShares iBoxx Investment Grade Corporate Bond Fund (NYSEArca: LQD) was selling at more than a 6% discount at one point. (See related story here.)

The broadest-based ETFs weren't immune. The iShares Lehman Aggregate Bond Index Fund (NYSEArca: AGG) was trading in early October with close to a 9% discount. And the Vanguard Total Bond Market ETF (NYSE: BND), which also follows the Lehman Brothers U.S. Aggregate Bond Index, was selling at a big discount.

As investors have flocked to safety with the ongoing global credit crunch still creating turmoil in fixed-income markets, Treasuries held up much better. In fact, during early October when most other categories of fixed-income ETFs were trading at historic discounts, the iShares Lehman 1-3 Year Treasury Index Fund (NYSE: SHY) had a slight premium attached to its shares.

It's not surprising, then, that PIMCO has decided to stick to the most liquid part of the bond market for its first ETF. And it's not at all difficult to imagine why one of the world's biggest bond shops has decided to enter a new market with a short-term portfolio rather than a midterm-oriented one.

According to the PIMCO 1-3 Year U.S. Treasury Index Fund's prospectus, it will trade on the NYSE Arca exchange and follow a Merrill Lynch benchmark. It's a market capitalization-sized index that PIMCO will replicate using a representative sampling technique.

The fund's prospectus can be found here.