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Investment Approach
- Fidelity® Limited Term Municipal Income Fund is a diversified national municipal bond strategy investing in general obligation and revenue- or tax-backed municipal securities across the short intermediate part of the yield curve.
- Our investment approach focuses on fundamental credit analysis, yield-curve positioning and an analysis of the structural characteristics of each security.
- The fund’s interest rate sensitivity is targeted closely to that of its benchmark to prevent interest rate speculation from overwhelming research-based strategies that we deem to have a higher likelihood of success.
- We emphasize a total-return approach that seeks to generate a high level of tax-exempt income, consistent with the preservation of capital.
Performance Summary
|
Cumulative |
Annualized |
|||||
|
3 Month |
YTD |
1 Year |
3 Year |
5 Year |
10 Year/ LOF1 |
|
|
Fidelity Limited Term Municipal Income Fund (MUTF:FSTFX) Gross Expense Ratio: 0.29%2 |
0.39% |
0.38% |
3.10% |
-0.18% |
0.90% |
1.22% |
|
Bloomberg Municipal Bond Index |
-0.02% |
-0.40% |
3.21% |
-0.88% |
1.16% |
2.39% |
|
Bloomberg 1-6 Year Municipal Bond Index |
0.16% |
-0.06% |
2.61% |
0.02% |
0.95% |
1.30% |
|
Lipper Short-Intermediate Municipal Debt Funds Classification |
0.32% |
0.42% |
3.07% |
-0.16% |
0.86% |
1.23% |
|
Morningstar Fund Muni National Short |
0.57% |
0.88% |
3.28% |
0.59% |
1.07% |
1.09% |
|
1Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/24/1986. 2This expense ratio is from the most recent prospectus and generally is based on amounts incurred during the most recent fiscal year, or estimated amounts for the current fiscal year in the case of a newly launched fund. It does not include any fee waivers or reimbursements, which would be reflected in the fund’s net expense ratio. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund’s Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit Fidelity Funds | Mutual Funds from Fidelity Investments, Financial Professionals | Fidelity Institutional, or Fidelity NetBenefits | Employee Benefits. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. For definitions and other important information, please see the Definitions and Important Information section of this Fund Review. |
Municipal Market Review
U.S. bonds in higher-yielding sectors modestly outperformed high quality U.S. government and tax-exempt municipal securities in the second quarter of 2024, though results for both hovered close to break-even for the three months. Rising bond yields posed challenges for bonds in April, but in May and June investors gained confidence that inflation was improving and that the U.S. Federal Reserve would begin to cut policy interest rates later this year.
For the three months, investment-grade municipal bond returns were virtually flat (-0.02%, including interest payments and price changes), according to the Bloomberg Municipal Bond Index. Climbing U.S. Treasury yields – which move in the opposite direction of prices – and a 35% year-over-year increase in tax-exempt bond issuance pulled municipal bond yields higher and weighed on prices. Year to date, the index has returned -0.40%.
Munis sold off in April (-1.24%) when the backup in Treasury yields hit its second-quarter peak. Investors pushed yields higher as they dramatically revised their expectations for interest-rate cuts in the face of U.S. economic resilience and sticky inflation. Market participants priced bonds with the expectation that the Fed would not start its rate-cut cycle before September, or perhaps not even until 2025, in contrast to their hopes at the beginning of 2024, when markets anticipated multiple cuts totaling 1.75 percentage points this year, starting in March.
Market technical factors created another springtime headwind for munis, which returned -0.29% in May. Investor demand for the asset class was choppy and borrowing by municipalities picked up, leading to swelling new-issue supply. Having avoided bond sales because they could lean on pandemic relief aid, more municipal issuers brought new debt to the market during the quarter, with some refinancing taxable Build America Bonds issued during the financial crisis of 2008-09.
Munis benefited from a broad fixed-income rally in June, posting a 1.53% gain. Bonds moved higher as yields declined when investors viewed a monthly consumer price index report showing cooling inflation as evidence that the Fed would indeed start to cut rates in September. Strong reinvestment demand helped bolster munis as well. June 1st marked the beginning of the annual seasonal pattern during which investors reinvest cash from bond maturities, calls and redemptions into munis. Concern about election-year proposals for higher taxes emerging from Washington also prompted some investors to add tax-free municipal bonds to their portfolios.
Full-quarter returns showed uneven results along the municipal maturity spectrum, with one-year (+0.82%) and 22+-year (+0.83%) bonds meaningfully outpacing all other segments, particularly seven- and 10-year issues (-0.85% and -1.04%, respectively). From an overall sector perspective, municipal revenue bonds outpaced general obligation bonds. Higher-yielding sectors such as housing, hospitals and industrial development revenue/pollution control revenue also outperformed this quarter. Overall, lower-quality investment-grade muni bonds rated BBB significantly outpaced those with mid-tier (AA and A) and high (‘AAA’) credit ratings.
Muni tax-backed credit fundamentals remained solid throughout the quarter, and the risk of credit-rating downgrades appeared low for most government issuers.
Three-Month Muni Index Returns By Sector
|
Sector |
Total Return |
|
Insured |
— |
|
Housing |
0.71% |
|
Hospital |
0.56% |
|
Prerefunded |
0.50% |
|
Industrial Revenue |
0.49% |
|
Special Tax |
0.05% |
|
Education |
0.02% |
|
Transportation |
-0.07% |
|
Electric |
-0.14% |
|
Water & Sewer |
-0.17% |
|
State GO |
-0.25% |
|
Local GO |
-0.34% |
|
Leasing |
-0.36% |
|
Resource Recovery |
-0.99% |
|
Index |
-0.02% |
|
Returns represent those of the Bloomberg Municipal Bond Index. |
Three-Month Muni Index Returns By Credit Quality
|
Quality |
Total Return |
|
AAA |
-0.28% |
|
AA |
-0.11% |
|
A |
0.22% |
|
BAA |
0.68% |
|
Index |
-0.02% |
|
Returns represent those of the Bloomberg Municipal Bond Index. |
Outlook and Positioning
At quarter end, the global business cycle remains in expansion, with reasonably healthy stabilization across geographies. The U.S. economic expansion demonstrates evidence of both mid- and late cycle dynamics. Disinflation trends and the move to monetary easing progressed globally in Q2, but persistent core inflation in the U.S. is making the “last mile” of disinflation toward the Fed’s 2% target more difficult.
After declining significantly from 2022’s highs, both headline and core inflation have remained above 3% in 2024. Nominal 10-year Treasury bond yields ticked modestly higher during the quarter, rising sharply in April then moderating in May and June. As is typical during a late-cycle expansion, the yield curve remains inverted. Current market projections signal an expectation of one rate cut from the U.S. Federal Reserve in 2024, most likely in September, but the timing and pace of easing is significantly diminished compared with expectations entering this year.
In Q2, tax-backed municipal issuer finances remained mostly solid. Though growth of tax receipts may continue to slow as they have over the past year, we believe most state and local governments are well-positioned to adjust.
Most states, for instance, have prudently managed recent surpluses by increasing their rainy-day reserves, paying down debt and strengthening pension plan funding.
It is important for investors to remember that Fidelity’s municipal bond portfolios are constructed with a careful and intentional emphasis on issue selection, especially with consideration to the liquidity of the security and the financial resiliency of its issuer. In the current environment, we continue to evaluate each fund’s investments and are monitoring those that may be more financially challenged than others.
Going forward, and as always, we will seek to identify opportunities to purchase municipal securities that offer both attractive valuations and a solid risk/reward profile. At quarter end, we continue to invest for strong risk-adjusted returns while remaining cautious with yield curve positioning, given the likelihood of ongoing interest-rate volatility.
Looking ahead, we remain committed to the approach of building individual exposures in the portfolio that reflect risks with which we are comfortable, at entry prices we believe offer strong relative value.
Municipal-Sector Diversification
|
Sector |
Portfolio Weight |
Index Weight |
Relative Weight |
Relative Change From Prior Quarter |
|
Transportation |
21.45% |
9.97% |
11.48% |
-1.25% |
|
Health Care |
16.02% |
5.22% |
10.80% |
0.95% |
|
Local Obligations |
13.99% |
16.90% |
-2.91% |
0.47% |
|
Corporate-Backed |
11.31% |
9.10% |
2.21% |
-0.96% |
|
State Obligations |
10.87% |
20.69% |
-9.82% |
0.59% |
|
Housing |
7.73% |
1.36% |
6.37% |
0.53% |
|
Special Tax |
5.02% |
10.51% |
-5.49% |
0.49% |
|
Higher Education |
5.01% |
4.32% |
0.69% |
-0.17% |
|
Electric & Gas |
4.49% |
4.35% |
0.14% |
0.10% |
|
Water & Sewer |
2.25% |
7.14% |
-4.89% |
0.07% |
|
Pre-Refunded |
1.41% |
8.24% |
-6.83% |
0.93% |
|
Tobacco |
0.25% |
0.20% |
0.05% |
0.01% |
|
Lease/Other |
0.06% |
0.74% |
-0.68% |
0.00% |
|
Cash & Net Other Assets |
0.14% |
1.26% |
-1.12% |
-1.76% |
|
Futures, Options & Swaps |
0.00% |
0.00% |
0.00% |
0.00% |
|
Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. |
Credit-Quality Diversification
|
Credit Quality |
Portfolio Weight |
Index Weight |
Relative Weight |
Relative Change From Prior Quarter |
|
U.S. Government |
0.00% |
0.00% |
0.00% |
0.00% |
|
AAA |
14.70% |
24.18% |
-9.48% |
0.64% |
|
AA |
43.82% |
52.71% |
-8.89% |
-0.06% |
|
A |
34.08% |
19.91% |
14.17% |
0.81% |
|
BBB |
4.80% |
1.85% |
2.95% |
0.59% |
|
BB |
0.60% |
0.00% |
0.60% |
-0.50% |
|
B |
0.00% |
0.00% |
0.00% |
0.00% |
|
CCC & Below |
0.00% |
0.00% |
0.00% |
0.00% |
|
Short-Term Rated |
0.00% |
0.00% |
0.00% |
0.00% |
|
Not Rated/Not Available |
1.97% |
1.35% |
0.62% |
-0.06% |
|
Cash & Net Other Assets |
0.03% |
0.00% |
0.03% |
-1.42% |
|
Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. Credit ratings for a rated issuer or security are categorized using the highest credit rating among the following three Nationally Recognized Statistical Rating Organizations (“NRSRO”): Moody’s Investors Service (Moody’s); Standard & Poor’s Rating Services (S&P); or Fitch, Inc. Securities that are not rated by any of these three NRSRO’s (e.g. equity securities) are categorized as Not Rated. All U.S. government securities are included in the U.S. Government category. The table information is based on the combined investments of the fund and its pro-rata share of any investments in other Fidelity funds. |
