MLP Yields and 10-Year Treasury Yields Diverged Last Week



AMLP yields in the week

The Alerian MLP ETF (AMLP) traded at a yield of 9.05% as the week ended September 25 wrapped up. The yield rose significantly during the week from 8.50% at the end of the previous week. AMLP tracks the Alerian MLP Infrastructure Index (AMZI), a subset of the Alerian MLP Index (AMZ).

Among the AMLP constituents, DCP Midstream Partners (DPM) was the top loser, falling 11.5% during the week. Sunoco Logistics Partners (SXL), Tesoro Logistics (TLLP), NGL Energy Partners (NGL), EQT Midstream Partners (EQM), and Genesis Energy (GEL) fell 9.3%, 9.2%, 8.9%, 8.6%, and 8.0%, respectively, during the week.

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10-year Treasury yields

US ten-year Treasury yields rose to close at 2.17% on September 25. They traded at a yield of 2.13% the previous week. During the week, concerns relating to global growth and weakness in stock markets fueled demand for Treasuries, bringing their yields down. However, the yields rose on Friday after Federal Reserve Chairwoman Janet Yellen indicated that a rate hike in 2015 is still highly likely.

The greater increase in AMLP’s yield compared to the ten-year Treasury yield resulted in an increase in the spread between the two securities, as you can see in the above graph.

MLP and Treasury yields

Generally, MLP yields move in the same direction as Treasury yields in the long term. MLP yields trade at a spread over Treasuries, as investors expect a risk premium for the additional risk undertaken over risk-free Treasuries.

In the long term, if Treasury yields fall—assuming there isn’t a change to the spread—energy MLP yields should also fall. This could mean a rise in MLP unit prices. A decline in yields means cheaper credit availability in order for an MLP to fuel growth. An expansion or contraction of the spread between MLP and Treasury yields would imply a higher or lower risk perception for an MLP, respectively.

The continued decline in energy prices recently has caused MLP yields to generally rise independently of the movements in Treasury yields. So the current widening of the AMLP–ten-year Treasury spread reflects a more fearful environment in the midstream energy sector.

Apart from interest rates, a number of other factors—such as commodity prices and demand for NGL (natural gas liquids) products—affect an MLP’s yield.


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