Master limited partnership yields are often benchmarked against corporate credit yields
The relative value of master limited partnerships (MLPs) is often compared to other yield vehicles, such as corporate bonds. This is because MLPs pay out a quarterly distribution, and one of the main investment points of MLPs is the income generated from owning them. The Alerian MLP Index, a capitalization-weighted composite of 50 energy master limited partnerships, was trading 205 basis points (or 2.05%) wide of the BofAML BBB corporate credit index on October 18 (an index that’s meant to represent the universe of bonds that are rated BBB). The spread between the two widened 15 bps from the end of September, when it was at 190 bps, which slightly increases the disparity between the two, and makes favoring MLPs over debt slightly more attractive.
Note that there’s an ETF that tracks the Alerian MLP Index, called the Alerian MLP ETF (AMLP). The top chart shows the historic yields of the two indices. Plus, as the chart below shows, the difference in yields between MLPs and corporate credit is wider than the ten-year average spread.
Rates on debt decreased because Fed tapering appears to be farther off
Earlier this year, interest rates backed up, as the markets feared that the Fed would soon curtail quantitative easing. However, recent comments from the Fed appeared to signal that tapering would be farther into the future, and the markets consequently responded with lower debt yields. For more on Fed tapering, see FOMC minutes reveal that the Fed really didn’t want to taper.
If you think rates will eventually rise again, MLPs such as Kinder Morgan Energy Partners (KMP), Enterprise Products Partners (EPD), Targa Resources (NGLS), and MarkWest Energy (MWE) or a fund such as the Alerian MLP ETF (AMLP) could be more attractive than corporate credit. Though MLPs have a yield component and can be sensitive to interest rate movements, theoretically they should be less sensitive when interest rates increase—as MLPs are equities that have some growth component and aren’t just held for income.
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