The muni market will eventually have to look toward the more digital-forward next generation of investors as the current investor base ages, experts said.
For now, the Baby Boom generation and its drastically increased average life expectancy provide some stability for the market's primary demographic.
Moreover, it's harder to market munis to younger generations who may not have the knowledge nor capability to invest in fixed-income securities.
A 2019 Municipal Securities Rulemaking Board report found the average age of investors who owned municipal securities was 61, and a significant amount of outstanding municipal securities was held by investors with an average age of 85.
As older generations live longer and younger generations shrink, an increasing dispersion accumulates across issuers, Jennifer Johnston, Franklin Templeton director of research on municipal bonds and fixed income, wrote in a report. Demographic change is slow and does not affect municipalities uniformly.
"Falling birth rates are already reshaping demand for public services and altering long-term credit trajectories across education-related sectors," she wrote. "For investors, this environment raises the cost of being indiscriminate. Issuer-level research is critical to distinguishing between credits that can adapt and those facing structural pressure, underscoring the value of professional municipal management in building resilient, long-term portfolios."
Figuring out a way to account for the shift in market demographics is crucial to the long-term future of the muni market; however, it does not seem to be a priority, given the current demographics' continued influence.
"We're not heading toward some cliff where it all just hits at once," said David Plaski, Federated Hermes' vice president, portfolio manager and senior investment analyst. "This is going to be something that we'll be observing over the next five, 10, 15, even 20 years."
Younger investors might not see the benefits of incorporating fixed income into their portfolios, he noted. "At the end of the day, munis could be a tough sell for any younger person who is not at or near the top of the income tax bracket," Plaski said.
This demographic shift impacts how money is managed in the municipal world, said Susan Joyce, head of municipal trading and fixed-income market structure at Alliance Bernstein, at the recent Bond Buyer Tech Forum.
In past years, financial advisors would suggest muni bonds for clients, who would invest in them, but "that group of individuals [investing] is starting to retire," she said.
As they retire, they are starting to pass assets off to their millennial or even Gen Z descendants, and that's not how the latter wants to invest, Joyce noted.
"They don't want to be picking bonds, and I think there's more of an awareness that leads you to bad outcomes if you're not able to fully analyze what the risk of that bond is," she said.
The muni market is slow to change. And while the younger generation is not a priority right now, advancements being made and considered may appeal to these investors.
Plaski and Jim Switzer, Alliance Bernstein's head of municipal bonds, agreed that one of the key shifts in municipal bond spaces is the incorporation and popularization of actively managed portfolios.
"[Clients] want to see active management, they want to see bonds in their portfolio and they want to understand why the trades are happening," Switzer said. "They want to see it digitally. They want to be able to go into a service center, click a button, and see their portfolio."
Experts believe that after a substantial transfer of wealth to younger generations, the digitization of the muni market will help its overall appeal.
This digitization is already underway. Whether it's exploring tokenization of debt securities, implementing artificial intelligence throughout the issuance process or discussing the potential of predictive AI within the market, muni participants are starting to break into these more digital-forward conversations.
"Municipal bonds are already well integrated into the digital landscape, with both retail and institutional investors able to access the market through online trading platforms that offer education and live trading capabilities," Principal Asset Management Portfolio Manager Jim Noble said.
The gradual shift toward modernization, coupled with the nature of investing, provide some market experts a positive outlook about attracting younger generations as they age.
Switzer believes fixed income will always have a place in a portfolio, and, with this eventual wealth transfer, people will want ways to mitigate risks while investing.
"You're even going to see people trying to figure out, 'How do I de-risk my portfolio?'" he said. "'I can't be in an 80/20 portfolio when I'm moving into my retirement age.'"
Jessica Lerner contributed to this report.
