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10-Year Treasury and MLP Yields Diverged

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AMLP yields in the week

The Alerian MLP ETF (AMLP) was trading at a yield of 9.7% at the end of last week on November 27. The yield was flat compared to the end of the previous week. AMLP tracks the Alerian MLP Infrastructure Index (AMZI)—a subset of the benchmark Alerian MLP Index (AMZ). AMZ rose 0.1% during the week.

Among the AMLP constituents, Williams Partners (WPZ), ONEOK Partners (OKS), and NuStar Energy (NS) were the biggest losers. They fell 7.7%, 2.6%, and 2.1%, respectively, during the week. MarkWest Energy Partners (MWE) and Magellan Midstream Partners (MMP) were the biggest gainers. They rose by 7.9% and 2.2%, respectively, during the week.

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Ten-year Treasury yields

US ten-year Treasury yields fell and closed at 2.2% on November 27. They traded at a yield of 2.3% at the end of the previous week. The fall in the ten-year Treasury yields was due to expectations of a rate hike by the Fed in 2015. This resulted in cash moving from short-term to long-term Treasuries. Long-term yields are influenced by global growth and long-term inflation expectations. Bond yields fall as bond prices rise.

Flat AMLP yields, combined with a fall in Treasury yields, resulted in a rise in the spread between the two securities, as the above graph shows.

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. 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 fall 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 fall in energy prices for more than a year caused MLP yields to rise independently of the movements in Treasury yields. Apart from the interest rates, a number of other factors like commodity prices and demand for NGL (natural gas liquid) products impact an MLP’s yield.

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