Key Energy MLP Indicators: Weekly Update
(Continued from Prior Part)
AMLP yields in the week
The Alerian MLP ETF (AMLP) was trading at a yield of 8.6% as last week wrapped up on October 30. The yield fell during the week from 8.9% at the end of the previous week. AMLP tracks the Alerian MLP Infrastructure Index (AMZI), a subset of the Alerian MLP Index (AMZ). Among the AMLP constituents, Williams Partners (WPZ), MarkWest Energy Partners (MWE), Tesoro Logistics (TLLP), DCP Midstream Partners (DPM), and TC Pipelines (TCP) were the biggest gainers, rising 6.8%, 6.8%, 6.4%, 4.3%, and 3.9%, respectively, during the week.
Ten-year Treasury yields
US ten-year Treasury yields rose to close at 2.2% on October 30. They traded at a yield of 2.1% at the end of the previous week. The rise in Treasury yields was driven by expectations of a rate hike by the Fed within 2015. Bond yields rise as bond prices fall.
A fall in AMLP yields, combined with a rise in Treasury yields, resulted in a decrease in the spread between the two securities, as the above graph shows. The spread fell after rising for two consecutive weeks.
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, as investors expect a risk premium for the additional risk undertaken over 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 decline in yields means cheaper capital availability in order for an MLP to fuel growth. An expansion or contraction of the spread between MLP and Treasury yields would imply a higher or lower risk perception, respectively, for an MLP.
The continued decline in energy prices for more than a year has generally 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 NGLs (natural gas liquids) products affect an MLP’s yield.
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