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10-Year Treasury-MLP Yield Spread Rose: Here’s Why

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AMLP yield fell

The Alerian MLP ETF (AMLP) was trading at a yield of 8.9% at the end of the week ending July 1, 2016. The yield fell marginally from the previous week. AMLP tracks the Alerian MLP Infrastructure Index (AMZI)—a subset of the Alerian MLP Index (AMZ). The index rose 2.6% during the week.

Among AMLP’s constituents, Shell Midstream Partners (SHLX), Enlink Midstream Partners (ENLK), NGL Energy Partners (NGL), Sunoco Logistics Partners (SXL), and EQT Midstream Partners (EQM) were the biggest gainers. They rose 6.6%, 6.5%, 5.5%, 5.3%, and 4.7%, respectively, during the week.

Ten-year Treasury yields

US ten-year Treasury yields fell to 1.46% last week from 1.57% the previous. A bigger decline in Treasury yields than MLP yields resulted in a marginal increase in the spread between the two securities.

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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 trend 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 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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