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10-Year Treasury and MLP Yields Diverged Last Week

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AMLP yields in the week

The Alerian MLP ETF (AMLP) was trading at a yield of 8.9% as last week wrapped up on October 23. The yield rose during the week from 8.4% 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, MarkWest Energy Partners (MWE), NGL Energy Partners (NGL), Western Gas Partners (WES), and Magellan Midstream Partners (MMP) were the biggest losers, falling 10.4%, 8.9%, 8.7%, and 8.2%, respectively, during the week.

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Ten-year Treasury yields

US ten-year Treasury yields rose to close at 2.09% on October 23. They traded at a yield of 2.04% at the end of the previous week. The rise in Treasury yields was in part a result of an interest rate cut by China, resulting in a rally in equity markets. This decreased demand for bonds. Bond yields rise as bond prices fall.

A proportionately greater rise in AMLP’s yield compared to the rise in the ten-year Treasury yield resulted in an increase in the spread between the two securities. The spread rose for the second consecutive week.

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 and the spread doesn’t change, energy MLP yields should also fall. This could mean a rise in MLP unit prices. A decline in yields means cheaper capital 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, respectively, for an MLP.

As the above graph shows, the continued decline in energy prices for more than a year has generally caused MLP yields to rise independently of the movements in Treasury yields. Apart from interest rates, a number of other factors such as commodity prices and demand for NGLs (natural gas liquids) products affect an MLP’s yield.

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