In the ever-evolving world of fixed-income investing, municipal bonds continue to stand out as a beacon for tax-conscious investors seeking stability and reliable income. As we reflect on the third quarter of 2025, Fidelity Investments’ Intermediate Municipal Income Fund (FLTMX) offers a compelling case study in how disciplined strategies can deliver value amid shifting economic tides. Managed by a team renowned for its deep expertise in tax-exempt securities, this fund has long been a go-to option for those aiming to balance yield with capital preservation. With assets under management swelling to over $13.5 billion, it’s clear that Fidelity Investments’ commitment to innovative, client-focused solutions resonates strongly in today’s market.
Q3 2025 marked a welcome rebound for the municipal bond sector, fueled by a confluence of positive forces. After a somewhat choppy first half of the year—characterized by lingering inflation concerns and fiscal policy debates—investors returned with renewed vigor. The Federal Reserve’s long-anticipated interest rate cut in September acted as a catalyst, easing borrowing costs and injecting optimism into the credit markets. This policy pivot, combined with robust demand from individual and institutional buyers alike, propelled investment-grade tax-exempt munis to solid gains. For context, the Bloomberg Municipal Bond Index climbed about 2.6% over the quarter, but longer-duration segments truly shone, underscoring the benefits of strategic duration management.
At Fidelity Investments, our approach to the Intermediate Municipal Income Fund has always emphasized a blend of fundamental rigor and opportunistic positioning. We invest primarily in intermediate-maturity general obligation (GO) and revenue-backed securities, targeting that sweet spot between three and 10 years in average duration. This positioning not only aligns with the fund’s objective of delivering high levels of federally tax-exempt income while safeguarding principal but also allows us to navigate volatility with agility. In Q3, this strategy paid dividends, as the fund posted a total return of 2.74%—outpacing its benchmark, the Bloomberg 3-15 Year (2-17) Municipal Bond Index, which returned 2.6%. Year-to-date through September, FLTMX is up 3.53%, a respectable figure in a category averaging just 2.8%.
What drove this performance? Let’s break it down. The quarter’s standout theme was the resurgence in longer-duration bonds, which benefited disproportionately from the rate cut. Securities with maturities of 10 years returned 3.03%, while those stretching to 15 years, 20 years, and beyond delivered 3.43%, 3.73%, and 3.82%, respectively. At Fidelity Investments, we had tactically overweighted these segments earlier in the year, anticipating a dovish turn from the Fed. Our portfolio’s effective duration hovered around 5.6 years, providing just enough sensitivity to interest rate moves without veering into excessive risk territory. This calculated extension helped capture upside while mitigating the drag from shorter-end maturities, which lagged with returns closer to 1.5-2.0%.
Sector allocation played a pivotal role as well. Revenue bonds, which finance essential projects like toll roads, hospitals, and utilities, edged out GO bonds with a 3.03% gain compared to 2.96%. This narrow spread highlights the sector’s underlying resilience—revenue payers often boast dedicated cash flows insulated from broader budgetary pressures. Within the fund, we maintained a diversified mix: approximately 35% in revenue bonds, 30% in GO issues, and the balance spread across pre-refunded securities and other high-quality credits. Notable performers included holdings in state-backed transportation authorities and healthcare providers, where improving occupancy rates and federal reimbursements bolstered credit profiles.
Fundamental credit analysis remains the cornerstone of our process at Fidelity Investments. Unlike passive strategies that merely track indices, our team—led by seasoned portfolio managers with decades of muni experience—conducts exhaustive bottom-up research. In Q3, we identified pockets of undervaluation in lower-investment-grade names (BBB-rated), where yields compensated for modest risks. For instance, we added selectively to essential service providers in the Southeast, where post-hurricane recovery funding from Washington enhanced repayment prospects. Conversely, we trimmed exposure to certain industrial development bonds facing temporary supply chain hiccups, prioritizing names with strong reserve cushions.
This active stewardship isn’t just about picking winners; it’s about risk management. Municipal bonds, while historically low-default, aren’t immune to macroeconomic headwinds. Q3 saw a modest uptick in issuance—total volume hit $85 billion, up 5% from Q2—as states and localities capitalized on lower rates to refinance debt. Yet, supply pressures were absorbed handily, thanks to inflows exceeding $12 billion into muni funds. At Fidelity Investments, we view this dynamic as supportive: healthy demand keeps spreads tight, currently at 85 basis points over Treasuries for intermediates, versus a historical average of 110.
Delving deeper into the fund’s portfolio, our yield-to-worst stands at an attractive 3.2%, offering a tax-equivalent yield north of 5% for investors in the top federal bracket. This is particularly appealing in an environment where taxable alternatives like corporate bonds are yielding similar gross but without the tax shield. Over the past decade, FLTMX has delivered annualized returns of 2.8%, ranking in the top quartile of its Morningstar peer group. More impressively, during the 2022 rate-hike storm, the fund’s downside capture was a mere 85% of the category average, a testament to our barbell approach—blending short-duration anchors with selective long-end extensions.
Looking at attribution, security selection in the revenue sector contributed 45 basis points to relative performance, while our modest overweight to California and New York issuers (states with robust pension funding progress) added another 20 bps. On the flip side, a slight underweight in high-yield munis (capped at 20% of the portfolio) tempered gains by 10 bps, but this was by design—preserving our investment-grade focus amid election-year uncertainties.
As we turn the page to Q4 2025, the outlook for municipals remains cautiously optimistic. The Fed’s September cut—to 4.75-5.00%—signals the start of an easing cycle, potentially lowering 10-year muni yields from their current 3.1% perch toward 2.8% by year-end. This could further buoy prices, especially if economic growth softens without tipping into recession. Fidelity Investments’ economists project U.S. GDP expansion at 1.8% for the full year, with unemployment ticking up to 4.3%—a Goldilocks scenario for bonds.
That said, risks loom. The upcoming presidential inauguration in January could usher in tax reform debates, potentially altering the appeal of tax-exempts. A repeal or cap on state and local tax deductions, for example, might crimp high-income demand. Supply-side pressures could intensify if infrastructure spending ramps under new legislation, pushing issuance toward $500 billion annually. And don’t overlook geopolitical tensions or renewed inflation spikes from energy shocks—these could prompt the Fed to pause cuts, pressuring durations.
In response, our team at Fidelity Investments is fine-tuning positioning. We’re extending duration slightly to 5.8 years, favoring 7-12 year paper where the curve offers the best roll-down potential. Credit-wise, we’ll lean into AA-rated opportunists in education and water/sewer sectors, where demographic tailwinds (e.g., aging infrastructure needs) support long-term viability. We continue to shun tobacco settlement bonds and other legacy risks, maintaining a portfolio beta of 0.95 to the benchmark for controlled volatility.
For investors, the Intermediate Municipal Income Fund exemplifies Fidelity Investments’ broader philosophy: empowering clients through transparency, innovation, and unwavering focus on outcomes. Whether you’re a high-net-worth individual optimizing for taxes, a retirement plan sponsor diversifying liabilities, or an advisor building resilient portfolios, this fund slots neatly into core fixed-income allocations. Its low expense ratio of 0.37%—among the category’s leanest—ensures more income flows to you, not fees.
Beyond numbers, municipals embody a civic ethos. By investing here, you’re not just chasing yields; you’re funding schools, bridges, and hospitals that knit communities together. In a polarized era, this tangible impact adds a layer of purpose to your portfolio. As Raymond James aptly noted in a recent report, “Munis aren’t just bonds—they’re bets on America’s foundational promise.”
In sum, Q3 2025 reinforced the enduring value of municipal bonds, and Fidelity Investments’ Intermediate Municipal Income Fund navigated it masterfully. With a track record spanning nearly five decades, we’re poised to capitalize on what’s next. As always, we invite you to consult with a Fidelity advisor to tailor these insights to your unique goals. After all, in investing, it’s not about timing the market—it’s about time in the market, guided by trusted expertise.