By some estimates, 11,000 baby boomers retire each and every day. For those keeping score at home, that works out to be 4.1 million boomers leaving the traditional workforce every year. Some move over to part time work or other jobs that aren’t as time-consuming as their traditional careers. Still, the point is that a lot boomers are leaving the workforce, and that trend will continue for the foreseeable future. There are implications in that retirement wave for advisors and fixed income investors, particularly those considering municipal bonds and the related ETFs.
Arguably overlooked in the baby boomer retirement wave is its impact on specific areas of municipal bond credit, namely debt issued by hospitals and senior living facilities run by states and cities.
“Rather than creating broad-based tailwinds, these demographic shifts are driving increasing divergence across issuers,” noted Jennifer Johnson of Franklin Templeton. “The sectors most directly exposed, hospitals and senior living, are experiencing the Silver Tsunami in very different ways, making bottom-up credit selection, revenue mix analysis and regional positioning increasingly important for municipal bond investors.”
Drilling Down on Retirement-Related Muni Credit Issues
As people age, their healthcare needs often increase. Some of that is preventative care and in many cases, it’s essential. Regardless, as the population ages, more strains are created on hospital systems, particularly nonprofits.
That implies that advisors considering hospital municipal debt need to assess a variety of factors, including regional demographics, payor mix, margins, balance sheets and more.
“The increasing demand for hospital services suggests organizations will need to increase their capital spending to maintain bed capacity, competitiveness and market share,” added Johnson. “This will likely result in an extended cycle of debt issuance to fund critical infrastructure projects and to catch up on capital plans postponed during the COVID-19 pandemic. The growing supply of health care credits makes the ability to differentiate between well-positioned and vulnerable issuers even more critical.”
As for senior living facility municipal debt, the asset class has demographic tailwinds, but it’s not risk-free, because default rates can be a concern.
“These favorable supply-demand dynamics anchor a stable outlook for the sector, but they do not eliminate credit risk. The 9% gross default rate is a reminder that demographic growth alone does not guarantee stronger credit,” observed Johnson.
Bottom line: Advisors may want to examine actively managed funds, including ETFs, as complements to broader passive fixed income funds in an effort to be more tactical with municipal debt.
For more news, information, and analysis, visit the Fixed Income Content Hub.
