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The Fidelity® Limited Term Municipal Income Fund (FSTFX) concluded the final quarter of 2025 with impressive gains, extending the positive trend observed in the preceding three months. This robust performance was primarily fueled by a decline in interest rates, consistent strength in tax-backed credit fundamentals, and a noticeable uptick in market demand. For the fourth quarter alone, the Bloomberg Municipal Bond Index recorded a 1.56% increase, encompassing both interest payments and price appreciation. This strong finish helped municipal bonds overcome a volatile first half of the year, ultimately achieving a respectable 4.25% total return for 2025. Looking ahead, market technicals suggest a potential continuation of high new-issue supply, as various issuers may increase borrowing in response to elevated costs and uncertainties surrounding future federal funding.

Fidelity's Strategic Approach to Municipal Income Fund

In the fourth quarter of 2025, Fidelity’s Limited Term Municipal Income Fund (FSTFX) demonstrated a well-executed investment approach, culminating in strong performance. The fund, a diversified national municipal bond strategy, strategically invests in both general obligation and revenue- or tax-backed municipal securities, with a particular focus on the short-to-intermediate segment of the yield curve. This period saw the fund outperform its benchmark, primarily due to astute security selection within airport and healthcare bonds, coupled with an advantageous positioning along the yield curve. Furthermore, the fund benefited from a higher average yield on its holdings compared to the Bloomberg 1-6 Year Municipal Bond Index. Presently, municipal bond yields continue to offer historically attractive levels. FSTFX maintains a disciplined stance, actively seeking out compelling valuations while cautiously navigating yield-curve positioning, anticipating ongoing interest rate volatility. The fund's portfolio exhibits a notable overweighting in transportation, corporate-backed, and healthcare sectors. In terms of credit quality, FSTFX shows a higher allocation to A-rated bonds, distinguishing its profile from the benchmark which has a greater concentration in AAA and AA-rated securities.

This quarter's results underscore the importance of active management and strategic sector allocation in the municipal bond market. Investors in municipal bonds should consider the long-term benefits of tax-exempt income, especially in an environment where yields remain attractive. However, the anticipated increase in new-issue supply and potential interest rate fluctuations highlight the need for careful portfolio construction and ongoing monitoring. Diversification across various municipal sectors and credit qualities, as demonstrated by FSTFX, can help mitigate risks while capturing opportunities in this evolving market landscape. The fund's emphasis on actively managing its yield-curve exposure reflects a prudent approach to navigating market uncertainties and aiming for consistent, favorable returns for its investors.