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Why the MLP Yield Spread Was Flat for the Week Ending July 22

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Jul. 27 2016, Updated 8:06 a.m. ET

AMLP yield fell

The Alerian MLP ETF (AMLP) was trading at a yield of 8.8% at the end of the week ending July 22, 2016. The yield fell marginally compared to the previous week. AMLP tracks the Alerian MLP Infrastructure Index (AMZI)—a subset of the Alerian MLP Index (AMZ). The index rose 1.1% during the week.

Among AMLP’s constituents, Energy Transfer Partners (ETP), Enbridge Energy Partners (EEP), and Spectra Energy Partners (SEP) were the biggest gainers. They rose 6.8%, 5.1%, and 4.4%, respectively, during the week.

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Ten-year Treasury yields

The US ten-year Treasury yield fell to 1.57% by the end of the last week ending July 22, 2016—compared to 1.6% during the week ending July 15, 2016. Equal movement in the Treasury yield and MLP yield during the week resulted in a flat 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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