The Attractiveness of Invesco Intermediate Term Municipal Income Fund in a High-Yield, Tax-Efficient Environment

The Invesco Intermediate Term Municipal Income Fund (VKLMX) has emerged as a compelling option for investors seeking tax-advantaged income in a rising interest rate environment. By focusing on intermediate municipal bonds—securities exempt from federal income tax and often state/local taxes—the fund offers a dual benefit: high yields and tax efficiency. As of August 2025, the fund’s effective duration of 5.65 years positions it to balance interest rate risk with yield potential, a critical consideration as the Federal Reserve continues to navigate inflationary pressures [2].

Tax Efficiency in a High-Yield Climate

Municipal bonds have long been a cornerstone for tax-advantaged income, particularly for investors in higher tax brackets. The Bloomberg Municipal Bond Index’s yield-to-worst (YTW) of 3.96% as of mid-2025 underscores their appeal, with taxable-equivalent yields reaching historically high levels [3]. For investors in the 22% federal tax bracket or higher, munis outperform corporate bonds, making funds like IMF attractive. The Invesco fund’s focus on investment-grade municipal bonds, combined with its flexibility to allocate up to 35% to below-investment-grade or unrated securities, allows it to capture higher yields while maintaining a disciplined credit approach [1].

Navigating Rising Rates: Duration and Strategy

Intermediate-term municipal funds like IMF are uniquely positioned to mitigate the risks of rising rates. With a duration of 5.65 years, the fund is less sensitive to rate hikes than long-term alternatives, which often have durations exceeding 10 years [2]. This intermediate positioning aligns with expert recommendations, such as Vanguard’s Sara Devereux, who highlights 5–6-year maturities as a sweet spot for balancing yield and volatility [1]. Additionally, the fund employs interest rate futures to manage duration dynamically, further insulating it from sharp rate swings [4].

However, the fund’s exposure to inverse floaters—a type of municipal bond whose yields rise as rates fall—introduces a caveat. In a rising rate environment, inverse floaters can underperform, as their value declines when benchmark rates increase [1]. Despite this, the fund’s 4-star Morningstar rating across 3-, 5-, and 10-year periods (out of 262 funds) suggests its managers have historically navigated such challenges effectively [1].

A Tax-Efficient Hedge Against Inflation

The fund’s expense ratio of 0.52% for its R6 class (VKLSX) is competitive within its category, enhancing its appeal for long-term investors [3]. For those in higher tax brackets, the tax-exempt income generated by IMF can offset the drag of rising rates. For example, a $10,000 investment in the fund would yield approximately $396 annually (based on the Bloomberg Municipal Bond Index’s YTW), with no federal tax liability—a stark contrast to taxable alternatives [3].

Conclusion

While rising rates pose challenges for fixed-income investors, the Invesco Intermediate Term Municipal Income Fund’s tax efficiency, intermediate duration, and strategic flexibility make it a standout option. Its ability to generate high yields in a tax-advantaged wrapper, coupled with active duration management, positions it to outperform in a climate where traditional bonds struggle. For investors prioritizing income preservation and tax optimization, IMF represents a well-structured solution.

Source:
[1] Invesco Intermediate Term Municipal Income Fund, [https://www.invesco.com/us/financial-products/mutual-funds/product-detail?audienceType=Institutional&fundId=30555]
[2] Invesco Intermediate Term Muni Inc A VKLMX, [https://www.morningstar.com/funds/xnas/vklmx/quote]
[3] Municipal Bonds: Mid-Year 2025 Outlook, [https://www.schwab.com/learn/story/municipal-bond-outlook]
[4] Invesco Intermediate Term Muni Inc A (VKLMX) - Yahoo Finance, [https://finance.yahoo.com/quote/VKLMX/]