The silver tsunami is here

As my colleague John Sherman recently highlighted in his piece “Economic Fun House,” the US population is aging rapidly. That demographic shift will have broad implications across the economy and financial markets. In our view, one area where the impact may be underappreciated is the municipal bond market — particularly within high-yield munis.

Within that universe, senior care stands out. The sector represents roughly 10% of the S&P Municipal High Yield Index, making it the fourth-largest component of the benchmark. It’s also one of the areas we currently regard as compelling. 

Senior care projects in the tax-exempt municipal market are sponsored by nonprofit borrowers. These organizations often develop Continuing Care Retirement Communities (CCRCs), which provide housing, services, amenities, and multiple levels of care as residents’ needs evolve. That structure is important. Unlike many for-profit operators that have drawn scrutiny in recent years for prioritizing profits over resident care, nonprofit CCRCs are generally mission-driven, with a focus on long-term care delivery, operating stability, and community service.

To understand why we are constructive today, it’s helpful to consider the sector’s recent trajectory. The pandemic that began in 2020 was an extraordinary shock for the sector, as the virus was particularly dangerous to the elderly population. This led to severe stress for communities caused by a variety of factors, including isolation protocols, elevated mortality, staffing challenges, and worried residents. Additionally, occupancy declined sharply as tour activity slowed or stopped altogether, limiting the ability to attract new residents. For newly opened projects, the timing was particularly challenging, as assumptions about how many seniors would take up residence quickly became unrealistic. Across the board, the overall net effects of the pandemic were severe drops in occupancy and extreme margin compression. Not surprisingly, bond spreads widened materially, reaching nearly double pre-pandemic levels.

As conditions began to normalize post pandemic, a second wave of pressure emerged. In the face of elevated inflation in 2022, operators faced sharply higher labor and food costs just as they were attempting to rebuild occupancy. Labor shortages drove increased reliance on agency staffing, putting further strain on margins. At the same time, many CCRCs experienced pressure on liquidity as both equity and fixed income markets declined. These declines led to severe unrealized losses in their investment portfolios, which generally make up a significant portion of their assets, causing balance sheet metrics to worsen significantly. As a result, spreads remained elevated through 2023, even as the immediate effects of the pandemic began to fade.

More recently, however, operating fundamentals have improved. Occupancy has steadily recovered and is now above pre-pandemic levels, reliance on agency staffing has moderated and in most cases been eliminated, and operators have implemented rate increases that better align revenues with cost structures. At the same time, the rebound in financial markets has supported liquidity and strengthened balance sheets. Debt service coverage has improved as revenues have stabilized and margins have begun to recover. In sum, we believe the sector is in a materially stronger position today than it was just a few years ago.

This brings us to the opportunity set. In our view, the backdrop for senior care in the high-yield municipal market is increasingly favorable. The most important driver is demographics. The aging of the US population is not a distant theme; it’s already underway and should continue to support demand for senior housing and care for years to come.

At the same time, supply dynamics are moving in the opposite direction. New development has slowed meaningfully since the pandemic, and elevated construction costs alongside tighter financing conditions have constrained the pace of new projects. The result is an emerging imbalance: demand is rising while supply growth remains limited. Over time, that dynamic should support higher occupancy, improved pricing power, and stronger credit fundamentals for existing operators.

Equally important, many issuers are entering this phase from a position of improving financial strength. Margins are strong, liquidity has stabilized, and balance sheets have strengthened. Additionally, many of the new projects that have been built in recent years have often seen good success upon opening. In our view, that combination leaves parts of the sector attractively positioned relative to current valuations.

Senior care is just one example of the broader opportunity set within high-yield munis. We believe the asset class offers a compelling combination of attractive tax-exempt income and resilient credit quality. For investors seeking both tax-exempt income and differentiated opportunity, high-yield municipals may be worth consideration.