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Investment Commentary

 

A Message from the Portfolio Management Team

By Eric Golden, CFA®, Fidelity Investments Money Management, Inc.* — September 30, 2019



Q3 | 2019 KEY TAKEAWAYS

MONETARY EASING CONTINUED AS THE FED CUT RATES TWICE

 
  • The U.S. Federal Reserve (the Fed) cut interest rates in July and September in an effort to sustain U.S. economic growth.
  • Further easing will likely be data dependent as the Fed is currently divided on the path forward.

STRONG DEMAND AND LIMITED SUPPLY REMAINED SUPPORTIVE OF BOND PRICES

  • Industry flows to municipal bonds continued on record pace.
  • Supply/demand forces may be less supportive entering the final months of the year.

FAVORED REVENUE BONDS OVER LOWER-RATED GENERAL OBLIGATION (GO) BONDS

  • The portfolio had greater exposure to health care, education, and transportation bonds, which were among the top-performing revenue sectors over the third quarter.
  • It had more selective exposure to lower rated, investment-grade GO bonds.

Market Review


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

The U.S. economy, primarily supported by the consumer, remained solid over the period. However, persistent challenges continued to test the strength and resiliency of U.S. economic growth. These include the global slowdown in manufacturing and the uncertain trade environment.

In response, the Fed elected to lower interest rates 0.25% in both the July and September meetings. It remains unclear if the Fed will continue on its path of monetary easing as the Fed governors were split on their September decision.

The investment-grade municipal market continued to perform positively, returning 1.58% in Q3.1 Heavy demand and limited supply continued to be the driving force in the market. Net flows into the asset class remained on a record pace as investors continued to place a high value on tax-free income (Chart A). This, coupled with muted supply, supported bond prices.

However, late in the quarter, the lower-interest-rate environment prompted market participants to issue bonds. This increased supply (Chart B) modestly softened the supply/ demand imbalance.

Strategy Positioning


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.

We continued to favor revenue sectors, with an emphasis on health care, transportation, and higher education bonds. These were among the best performing sectors for the period. We believe revenue sectors generally offer:

  • Better relative value than lower-rated investment-grade general obligation (GO) bonds
  • Less susceptibility to the ongoing challenges of underfunded pension liabilities

We closely monitored bond values in both the revenue and tax-backed sectors as interest rate volatility created investment opportunities over the quarter. Nonetheless, our exposure to lower-quality, investment-grade state GO bonds remained limited.

The portfolio’s level of interest rate sensitivity (duration)2 was kept in line with the benchmark.3

Market Outlook

Entering the final months of the year, we anticipate market volatility may continue and the resiliency of the U.S. economy may be tested. The market environment will likely be driven by the evolution of the following economic elements:

  • U.S./China trade negotiations
  • The path of Fed policy
  • Consumer spending and sentiment
  • Corporate earnings

In the municipal market, lower interest rates have started to influence the supply/demand dynamics. They may be less supportive than recent history. However, investors are still placing a high premium on tax-exempt income as evidenced by the record level of inflows year-to-date.

We continue to believe a diversified portfolio that incorporates high-quality municipal bonds can help preserve capital and help you remain on the path to achieving your long-term financial goals.