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Fidelity® Strategic Disciplines


A Message From the Portfolio Management Team

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



  • The U.S. Federal Reserve (Fed) aggressively cut the Federal Funds Rate to its lowest level of 0.00%–0.25%.
  • The Fed also aided liquidity through security purchases and the establishment of lending facilities.
  • Congress responded with a $2T stimulus package to help offset the slowdown in economic activity.


  • Fears of the coronavirus pandemic drove a flight to quality and led to a selloff in munis in the second half of the quarter.
  • Elevated muni yields, coupled with declining Treasury yields, made munis more attractive on a relative basis.


  • Your account had greater exposure to health care, education, and transportation bonds.
  • We opportunistically navigated these revenue sectors and avoided lower-rated state general obligation (GO) bonds.

COVID-19 pandemic materially shifted market conditions

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

The year began with a healthy U.S. economy, modest GDP growth, low inflation, and a very strong consumer aided by low unemployment. In mid-February, the escalation of COVID-19 infections across the globe magnified the potential for economic losses. We began to see investor outflows from “risk” assets, like stocks, into perceived “risk-free” assets, such as U.S. Treasuries. Liquidity challenges also became evident throughout the bond markets.

The Fed cut short-term rates all the way to their lowest range of 0.00%–0.25% to aid the economy. It also took action to support market liquidity. Additionally, Congress passed the $2T CARES Act to aid workers and businesses affected by the coronavirus with the hope that it would ease the economic slowdown. Long-term interest rates also declined due to economic growth concerns.

Demand for municipal bonds was highly volatile

The municipal bond market experienced record outflows, at a magnitude and speed significantly worse than the 2008 global financial crisis. This was primarily due to two factors:

  • Demand for municipals weakened in late February as investors sought the perceived safety of U.S. Treasuries.
  • Sharp declines in equities drove institutional investors to liquidate their municipal bond positions to rebalance into stocks (Chart A).

As the municipal market experienced outflows and rising yields, U.S. Treasuries continued to receive inflows, causing their yields to fall. Muni yields as a percentage of Treasury yields reached a peak not seen since the global financial crisis. This attracted a surge of investor demand resulting in a market rally at quarter-end (Chart B). Despite the short‑term performance volatility, the market ended the quarter flat, returning –0.01%.1

Strategy positioning: favoring revenue sectors and higher‑quality state GO bonds

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.

Within your account, we continued to favor revenue sectors, with an emphasis on health care and transportation bonds. Where appropriate over the quarter, we opportunistically added to these sectors.

The rapidly changing economic environment affected all municipal sectors, especially those noted above:

  • Within health care, we believe that our investments in local and regional market-leading hospitals will remain viable and will weather the storm with the help of federal aid.
  • In transportation, we continue to have conviction in the overall financial health of our investments in essential service providers. These include regional airport hubs and large-presence mass transit systems.

State and local governments also were not immune to the economic impact. With growing unemployment, the delay in the income tax–filing date, and sales taxes falling, municipal governments face the prospect of rising expenses amid collapsing revenue. Due to these challenges, we continued to avoid lower-rated state GO bonds. Finally, the level of interest rate sensitivity (duration) of your account was kept in line with the benchmark.2

Challenging times are likely to continue, but we believe we are well positioned to navigate the volatility

Duration is a measure of the portfolio’s price sensitivity to changes in interest rates. Generally, portfolios with longer duration will be more price sensitive to changes in interest rates than portfolios with shorter duration.

It can be unsettling when markets decline significantly in a short period. Given the unknowns surrounding the potential global spread of COVID-19, the bond markets and, broadly, the capital markets are likely to remain volatile.

However, it’s important to remember that we have been through periods of major market and economic disruption before. While unsettling, these episodes often present active managers with the opportunity to identify attractive relative value opportunities.

We will continue to rely on our deep and experienced research team. Here’s what they are doing for your portfolio:

  • Processing new pandemic, economic, monetary, and fiscal policy information as it becomes available.
  • Continuing to manage your account with a careful and intentional emphasis on security selection.
  • Looking at each bond’s level of liquidity and overall financial resiliency.

Finally, please note that we manage your portfolio consistent with our objective of generating income while limiting risk to principal over the long term.