10-Year Treasury, MLP Yield Spread Fell Last Week

AMLP yield rise

The Alerian MLP ETF (AMLP) was trading at a yield of 10.8% for the week ending April 15, 2016. The yield fell from 10.9% at the end of the previous week. AMLP tracks the Alerian MLP Infrastructure Index (AMZI)—a subset of the Alerian MLP Index (AMZ). AMZ rose 1.1% during the week mostly due to a significant rise on April 12.

Among AMLP’s constituents, Williams Partners (WPZ), Enbridge Energy Partners (EEP), DCP Midstream Partners (DPM), NuStar Energy (NS), and NGL Energy Partners were the biggest gainers. They rose 13.1%, 7.9%, 5.9%, 4.2%, and 3.9%, respectively, during the week. Williams Partners rallied for the third consecutive week ending April 15, 2015. It rose 29.6% in the past month.

10-Year Treasury, MLP Yield Spread Fell Last Week

Ten-year Treasury yields

US ten-year Treasury yields rose to 1.8% during the previous week ending April 15, 2016—compared to 1.7% during the week ending April 8, 2016. A relatively greater rise in the MLP yield—compared to the rise in the Treasury yield—resulted in a decline 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 in 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 liquid products impact MLPs’ yields.