AMLP yield rose
The Alerian MLP ETF (AMLP) was trading at a yield of 11.4% at the end of the week ending March 25, 2016. The yield rose from 10.7% at the end of the previous week. AMLP tracks the Alerian MLP Infrastructure Index (AMZI)—a subset of the Alerian MLP Index (AMZ). AMZ fell by 4.95% during the week.
Among AMLP’s constituents, Williams Partners (WPZ), Plains All American Pipeline (PAA), Oneok Partners (OKS), Sunoco Logistics Partners (SXL), and Genesis Energy (GEL) were the biggest losers. They fell by 9.8%, 9.7%, 8.6%, 7.4%, and 7.1%, respectively, during the week.
Williams Partners crashed most likely due to the rise in speculation over the deal between Williams Companies (WMB) and Energy Transfer Equity (ETE) following ETE’s announcement of lower expected merger synergies. SXL, PAA, and GEL—all crude oil heavy energy MLPs—declined last week because US crude oil prices retreated after crossing the $40 per barrel resistance.
Ten-year Treasury yields
US ten-year Treasury yields rose to 1.91% during the previous week ending March 25, 2016, compared to 1.88% during the week ending March 18, 2016. A relatively greater rise in AMLP yield compared to the 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. Investors expect a premium for the additional risk that comes with MLPs compared to 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 for an MLP to fuel growth. An expansion or contraction of the spread between MLPs and Treasury yields would imply a higher or lower risk perception, respectively, for MLPs.
The continued fall in energy prices since mid-2014 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 natural gas liquids products impact MLP yields.
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