-Last week, the yield on the ten year US Treasury increased by 4
bps from 2.13% to 2.17%. Yields increased as the market speculated
that the Federal Reserve could soon scale back or end its current
bond buying program, which pumps money into the financial system
and keeps interests rates low.
-The yield on the ten year US Treasury has increased
significantly, from 1.63% in early May to approximately 2.15%
currently, and is near its highest point in over a year.
-Treasury yields matter because MLPs can be rate-sensitive
instruments and an increase in Treasury yields could push investors
to require more yield out of riskier investments such as MLPs.
Investors who hold master limited partnership ( MLP ) stocks often
monitor interest rates on Treasury bonds. This is because many
investors hold MLP stocks for the distribution or "yield" component
of the securities. US government Treasury yields are relevant
because if rates on the bonds increase, investors should expect
rates on MLPs to theoretically increase as well. This is because
many view US Treasurys as one of the safest yielding investments in
the financial universe, and if the rates on Treasurys increase, the
yield required from MLPs (and all other yield instruments) should
also theoretically increase. When the yield on MLPs increases, the
price and valuation of MLPs decrease.
Additionally, when yields on instruments such as Treasurys
decrease, it also pushes investors seeking current income into
other instruments such as corporate bonds and MLPs. Therefore, as
Treasury yields decrease, yields across the bond sector and higher
dividend stocks such as MLPs also tend to decrease.
The yield on the benchmark ten year Treasury decreased slightly
last week as it rose from 2.17% to 2.13% for the week ended June
14. The yield on the ten year Treasury has been consistently on the
rise since early May when it was trading at around 1.65%, compared
to current levels of ~2.15%. The rate on the ten year Treasury is
near the highest it has been in over 52 weeks.
This is the first week that the rate on the ten year Treasury is
decreased after four weeks of rising. Yields had generally
compressed since mid-March when the ten year was trading around ~2%
to lows of 1.65% in late May until increasing at a relatively quick
pace to current levels of ~2.15%.
In the context of a longer time period, Treasury yields had been
close to all-time lows for awhile, though recently yields have
The low yields over the past few years have mostly a consequence
of the Federal Reserve pumping money and liquidity into the
Except for the period of the financial crisis, where investors
pulled money out of riskier investments such as equities (which
MLPs are) and poured it into cash and Treasuries, MLP yields have
often moved directionally the same as Treasury yields.
Last week, the yield on the ten year Treasury decreased very
slightly, which was a slight positive for MLPs. However, over the
past several weeks, the yields on Treasury instruments had
increased to the highest points in over a year which was a negative
medium-term catalyst for the rate-sensitive MLP sector. Lastly,
from a longer-term perspective rates remain relatively low which
has resulted in a long-term positive for MLPs. If rates eventually
rise for example to pre-recession levels of 4-5%, it could be a
negative for MLPs and the Alerian MLP Index ( AMLP ). Major names in
the index include Enterprise Products Partners ( EPD ), Kinder Morgan
Energy Partners ( KMP ), Magellan
Midstream Partners ( MMP ), and Plains All
American Pipeline (PAA). Therefore, owners of MLPs should be aware
of rate movements and how they affect MLPs.
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