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Why MLP and 10-Year Treasury Yields Converged Last Week

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AMLP yields in the week

The Alerian MLP ETF (AMLP) was trading at a yield of 8.3% as last week wrapped up on October 9. The yield fell during the week from 8.8% 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 gainer, rising 13.5% during the week. ONEOK Partners (OKS), MarkWest Energy Partners (MWE), and Tesoro Logistics (TLLP) each rose more than 11% during the week.

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10-year Treasury yields

US ten-year Treasury yields rose to close at 2.1% on October 9. They traded at a yield of 2% at the end of the previous week. The rise in Treasury yields was in part due to demand for riskier assets, which resulted in a falling demand for bonds. Bond yields rise as bond prices fall.

As the above graph shows, the fall in AMLP’s yield combined with a rise in the ten-year Treasury yield resulted in a decrease in the spread between the two securities. The spread fell 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.

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 NGL (natural gas liquids) products affect an MLP’s yield.

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