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Last Week's Interest Rate Hike: The Impact on MLPs

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Last Week's Interest Rate Hike: The Impact on MLPs PART 1 OF 2

Last Week’s Interest Rate Hike: The Impact on MLPs

MLPs and interest rates

The Alerian MLP Index fell week-over-week to close 0.90% lower last week. Similar to utilities and REITs, MLPs rose 1.3% on March 15, 2017, on the Fed’s softer-than-expected tone for future rate hikes.

Usually, rising interest rates negatively impact MLPs since higher interest rates increase their cost of debt. MLPs distribute most of their cash flows as distributions and depend heavily on debt and equity financing to fund growth projects.

Last Week&#8217;s Interest Rate Hike: The Impact on MLPs

Last Week&#8217;s Interest Rate Hike: The Impact on MLPs

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MLPs and the energy sector

The Alerian MLP ETF (AMLP), a fund of top energy MLPs, ended last week 0.60% lower. As you can see in the above graph, although MLPs rose on March 15, 2017, their gains were lower than the broader energy sector (XLE), which rose 2.2%, and utilities, which rose 1.6%. MLPs fell the last two days of the week along with the energy sector.

The subdued response of MLPs to the interest rate hike partly reflects the trend since the energy price turmoil. MLPs are more influenced by oil dynamics than interest rates. However, the two positive factors—the Fed’s less hawkish tone and the price of oil—should have caused MLPs to rise more than the broader energy sector on the day the rate hike was announced. But that didn’t happen. MLPs also underperformed yield-based utilities and REITs, despite the positive crude oil movement that day.

The above graph shows how Enterprise Products Partners (EPD), Plains All American Pipeline (PAA), Williams Partners (WPZ), and Magellan Midstream Partners (MMP) performed last week. You can find out more about these top MLPs in Are These MLP Giants Having a Blue Christmas?

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