10-Year Treasury and MLP Yield Spread Fell Last Week



AMLP yield fell

The Alerian MLP ETF (AMLP) was trading at a yield of 10.9% at the end of the week ending April 8, 2016. The yield fell from 11.3% 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 2.2% during the week.

Among AMLP’s constituents, Williams Partners (WPZ), NGL Energy Partners (NGL), EnLink Midstream Partners (ENLK), DCP Midstream Partners (DPM), and NuStar Energy (NS) were the biggest gainers. They rose 10.3%, 9.4%, 8.5%, 6.3%, and 5.5%, respectively, during the week. The entire midstream sector rallied on Friday following a rise in crude oil prices.

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Ten-year Treasury yields

US ten-year Treasury yields fell to 1.7% during the previous week ending April 8, 2016, compared to 1.8% during the week ending April 1, 2016. A relatively greater fall in MLP yield compared to the fall in 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 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 MLPs’ yields.


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