The retirement of tens of millions of Baby Boomers over the next few decades has led to much speculation. Much of it even may come to pass in what should amount to a clear example of the maxim "demography is destiny." Some recent research contends that such a massive move out of the work force will help and hurt various industries and investments. One investment that should benefit, however, are Treasury bonds.

An Unprecedented Graying of America

According to data from The Department of Health & Human Services’ Administration on Aging, roughly 40 million Americans are at least 65 year old – the traditional retirement age. By 2030, that number is expected to swell to 72 million – almost one in five of the projected U.S. population at that time. The Pew Research Center puts it even more succinctly, noting that from 2011 to 2030, 10,000 baby boomers will reach age 65 every day. That's a lot of early bird specials – certainly enough to affect the labor market. RBC Capital Markets, which along with Morgan Stanley (MS) and 20 other primary dealers, are required to participate in all U.S. government debt auctions, says working-age population growth will slow to 0.2% over the next decade, down from 1.2% in the years preceding the financial crisis.

Big Yield Rise Has Not Materialized

Having comparatively fewer Americans of working age should depress spending and inflation, the latter of which has been under 2% for the past two years. Economic growth will stagnate since consumer spending makes up 70% of the U.S. economy. But the bond market should do nicely, as burgeoning ranks of retirees look to the safety of low-risk, income-producing investments. That growing demand has thus far suppressed bond yields, which many economists had predicted would rise significantly in 2014. (For more on this topic, see Demographic Trends And The Implications For Investment.)

That big yield rise has yet to materialize yet, though. And Ten-year Treasury yields, currently hovering around 2.5%, may not rise significantly anytime soon due to the tamping effects of an aging population coupled with stagnating hourly earnings. The Commerce Department said gross domestic product grew at an annualized rate of only 0.1% in the first quarter of 2014, though Department of Labor statistics do show continued improvement in the jobs market. Unemployment dipped to 6.3% in April, it’s lowest level since the last quarter of 2008, and the four-week moving average for initial unemployment claims is at its lowest level since June 2, 2007.

Retirees will continue to buy Treasuries, though, for their safe, steady income. Those seeking to access U.S. government bonds should consider the PIMCO 1-3 Year U.S. Treasury Index ETF (TUZ), the iShares 10-20 Year Treasury Bond ETF (TLH), the Schwab Intermediate-Term U.S. Treasury ETF (SCHR) and the Vanguard Extended Duration Treasury Index Fund (EDV), among others. Each bond exchange-traded fund offers low fees (0.15% or lower). (For more on this topic, see Top 10 Investment For Baby Boomers.)

Japan's Example

For those seeking a clue as to what to expect from the huge demographic change, slow growth and an aging population have been burdening Japan for a generation now. The yield on Japanese 10-year government bonds, which had averaged about 4% in the 1990s, hasn’t surpassed 1% in more than two years, and is currently averaging about 0.6%. (For more on this topic, see Japan Government Bond ETFs: How Low Can Yields Go?)

The Bottom Line

The impact of retiring Baby Boomers will come with many knock-on effects. The labor market, wage growth, real estate values and certain investment products will feel the weight of millions of people leaving the workforce, cutting spending and generally reducing their investment risk profiles. U.S. Treasury bonds, always a safe haven, are likely to see heightened demand and somewhat muted yields.

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