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10-Year Treasury, MLP Yield Spread Rose Last Week

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AMLP yield rose

The Alerian MLP ETF (AMLP) traded at a yield of 9.3% in week ended June 10, 2016. The yield rose compared to the previous week. AMLP tracks the Alerian MLP Infrastructure Index (AMZI)—a subset of the Alerian MLP Index (AMZ). The index fell 0.85% during the week.

Among AMLP’s constituents, EnLink Midstream Partners (ENLK), Genesis Energy (GEL), Shell Midstream Partners (SHLX), DCP Midstream Partners (DPM), and EQT Midstream Partners (EQM) were the biggest losers. They fell by 4.4%, 3.1%, 3.0%, 2.9%, and 2.4%, respectively, during the week.

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10-Year Treasury yields

The US 10-Year Treasury yield fell during the week ended June 10, 2016. A rise in the MLP yield combined with a fall in the Treasury yield resulted in a rise 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 has 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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