Are Rising Treasury Yields behind the Higher MLP Yields?

The Alerian MLP Index (AMZ) is trading at a yield of ~7.9%, which is ~5% higher than US ten-year Treasury yields. Usually, 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 rise and the spread doesn’t change, energy MLP yields should also rise, which could mean a fall in MLP unit prices. A rise in yields means a rise in the cost of capital required for an MLP to fuel growth.

An increase by nearly 100 basis points in US ten-year Treasury yields in the past year likely contributed to MLPs’ higher yields, despite supportive oil prices. The above graph shows AMZ and US ten-year Treasury yields.

Enterprise Products Partners (EPD), Energy Transfer Partners (ETP), Plains All American Pipeline (PAA), Magellan Midstream Partners (MMP), and MPLX (MPLX) form ~45% of the Alerian MLP Index. The five MLPs are trading at yields of 5.9%, 10.1%, 5.0%, 5.6%, and 7.3%, respectively.

Read Which MLPs Offer the Highest Yields? to learn more.

Next, we’ll discuss how the top MLPs have fared in 2018.