Royalties if the Rates Don't Rise

Nov 14, 2014
It's been a rough half-decade for income investors. With the Federal Reserve lowering interest rates to near 0% levels after the housing collapse, even yields of 2% are attractive. Those who grew up with money-market accounts yielding 5% and CDs paying over 7% have been stunned. Now, you must buy a bond maturing in 10 years or more in order to earn a paltry 3%. For savers and investors, those miniscule yields present a problem. You lose to inflation keeping your assets in money markets, but take on substantial interest rate risk when buying long-term bonds. The real risk for today's savers is if the rates don't rise. Nobody feels great about buying a 5-year CD that yields 0.89%, that is, unless the same 5-year CD is yielding 0.75% a few months down the line. 10 Year Japanese Government Bond Yield_Royalty Review_11132014
10-Year Japanese Government Bond Yield (1990-2014)   Source:
It could happen. Consider Japan, which had a stock and real estate boom in the late 1980s, just as the U.S. did in the mid-2000s. Japan's stock market bubble collapsed in the early 1990s, after which the Japanese Central Bank lowered interest rates to spur economic growth. Rings a bell with our economy, doesn't it? And while it seems impossible today that U.S. interest rates can go much lower, the same Japanese Government bonds yielding 5% in 1992 were paying 0.45%, twenty-two years later. Those waiting for higher rates are still waiting. As previously discussed, music royalties on Royalty Exchange, Inc. have recently sold for yields in excess of 15%+. While they are by no means similar to government bonds in terms of risk, if the United States follows Japan's post-bubble path, comparatively high-yielding music royalties offer unique potential returns. Not only is the income from music royalties uncorrelated with stocks, but also their already rich initial yields could be even more attractive if, like in Japan, U.S. interest rates stay lower than most people expect. Click here to see royalties at auction on Royalty Exchange.  For more information on royalty investing check out these other Royalty Review articles by guest columnist and investment analyst, Jonathan Hoenig: "Mineral Rights for the Mind" "Make Your Music Royalty Mutual Fund" How to think of Royalties A Royal(ty) Return Diversify with Music Is Liquidity Overrated? Let Royalties Help Slice the Pie When Music Appears in a Film