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MLP Yields and 10-Year Treasuries Diverged Further

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AMLP yields

The Alerian MLP ETF (AMLP) was trading at a yield of 12.1% at the end of the week ended January 15, 2016. The yield rose from 10.8% at the end of the previous week. AMLP tracks the Alerian MLP Infrastructure Index (or AMZI). AMZI is a subset of the benchmark Alerian MLP Index (or AMZ). AMZ fell by 9.9% during the week.

Among the AMLP constituents, the following were the biggest losers:

  • NGL Energy Partners (NGL): -23.7%
  • Targa Resources Partners (NGLS): -22.8%
  • Williams Partners (WPZ): -22.1%
  • Enbridge Energy Partners (EEP): -18.9%
  • Energy Transfer Partners (ETP): -16.8%

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10-year Treasury yields

US ten-year Treasury yields fell to close at 2.0% on January 15, 2016, compared to 2.1% at the end of the previous week. Bond yields fall as bond prices rise. As the above graph shows, an increase in AMLP yield combined with a fall in Treasury yield resulted in an increase in the spread between the two securities.

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 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 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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