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Fidelity® Strategic Disciplines


A Message From the Fidelity® Intermediate Municipal Strategy Portfolio Management Team

By Eric Golden, CFA®, Fidelity Management & Research Company LLC* — December 31, 2020

Key takeaways

  • Market Backdrop: Higher-yielding assets outperformed U.S. Treasuries to finish the unprecedented year.
  • Performance: Investment-grade municipals returned 0.80% for Q4 and nearly 4.8% for the year.1

  • Positioning: Maintained a focus on healthcare and transportation revenue sectors.
  • Outlook: Continued market volatility likely as prospective economic reopening may face headwinds.

Investment Objective

The Fidelity® Intermediate Municipal Strategy seeks to generate federally tax‐exempt interest income while limiting risk to principal over the long term.

Market Backdrop

Higher-yielding assets outperformed U.S. Treasuries to finish the unprecedented year

  • Higher-yielding assets benefited from promising vaccine news and a potential divided government post-election
  • Optimism of an economic reopening led investors to reduce their higher-credit-quality investments in U.S. Treasury bonds
  • Despite a low-yield environment, investment-grade bonds continued to provide stability, diversification, and capital preservation

Leading up to the 2020 U.S. election, the potential for a divided government was viewed positively by investors. Many believed political gridlock would help mitigate against perceived policy agendas such as higher taxes. Further, the approval of two highly effective vaccines helped state and local economies move one step closer to a pre-pandemic environment. This context was positive for higher-yielding investment-grade bonds over the quarter.

Meanwhile, U.S. Treasury prices fell during the period due to positive economic expectations and the potential for more fiscal stimulus. Yet, their overall performance in 2020 remained strong. A low-yield, volatile environment persisted for much of 2020.


Investment-grade municipals posted positive returns for the year

  • Strong demand and lower supply pushed municipal bond prices higher
  • Election results and the increased likelihood of a federal stimulus package helped fuel demand
  • Lower-rated and higher-yielding bonds outperformed in the quarter but lagged for the year

Investment-grade municipal bonds posted positive returns in Q4 and returned nearly 4.8% for the year1. Markets experienced continued strong demand and lower supply. This kept downward pressure on yields (Chart A) and supported bond prices. Post-election, investors continued to favor municipal bonds based on the increasing likelihood of another round of stimulus. Further, initial election results pointed toward a divided government. As the dust settled, a Democrat-controlled White House and Congress emerged. While this was initially viewed as a potential headwind for the broader economic markets, municipal investors viewed this favorably. A Democrat-controlled legislature increases the likelihood of more aid to financially challenged state and local governments as well as higher taxes which could increase the future demand for municipal bonds.

As municipal yields continued to fall over the period, investors continued to stretch for yield. As a result, lower-rated investment-grade bonds outperformed higher-rated bonds. For the quarter, BAA-rated bonds outperformed AAA-rated bonds by 2.31%. Conversely, AAA-rated bonds outperformed BAA-rated bonds for the year by nearly 1% (Chart B).

Revenue bonds are bonds that are backed by a specific source of revenue from the project financed with the bond. This may include transportation, health care, water and sewer systems, electric utility, etc.

General obligation bonds are bonds issued by state and local municipalities that are backed by the full faith, credit, and taxing power of the issuer.


Favored revenue sectors over general obligation bonds

  • Continued to favor healthcare and transportation sectors
  • Monitored issuers which stand to materially benefit from increased federal aid

Within your account, we continued to favor revenue sectors over tax-backed general obligation bonds. We maintained a focus on healthcare and transportation. Both sectors were among the top returning sectors in the quarter. They continue to weather and recover from the economic impact of the pandemic. Throughout the year, hospitals have benefited from the renewal of elective surgery and federal stimulus. Transportation hubs, like major airports, have also taken advantage of government aid.

Additionally, we continued to closely monitor individual issuers across sectors with significant financial challenges. Some of them stand to materially benefit from an increased level of federal stimulus. We remained opportunistic across all sectors and took advantage of attractive valuations during the quarter.

Finally, your account’s level of interest rate sensitivity (duration)2 was kept in-line with the benchmark3.


Remaining opportunistic as we anticipate market volatility

  • Vaccine roll-out and fiscal and monetary policy likely to impact the rate of a global economic recovery
  • With a Democrat-controlled government, keeping a close eye on the potential for increased federal stimulus
  • Maintaining a disciplined approach to help navigate this uncertain market environment

The market viewed the recent vaccine news positively. This led to a rising stock market and higher U.S. Treasury yields. Yet, increasing infections across the nation have led many state and local economies to pause or roll-back reopening plans. Continued accommodative monetary policy and the potential for increased federal stimulus will help to stabilize the economy in the short run. However, the rate of economic recovery may be impacted by unforeseen challenges.

Given this context, we anticipate market volatility in the months ahead. We will continue to manage your account with a careful and intentional emphasis on security selection. We are being mindful of each bond’s overall financial resiliency and liquidity. We will continue to look for attractive entry points into securities that we believe are appropriate for your account.

We believe investment grade bonds will continue to play an important role in client portfolios. They can provide stability and diversification. They also can help preserve investor capital when used in a balanced portfolio with stocks.