How Interest Rates will impact MLPs in 2011
"Historically, traditional high-yield groups like MLPs (master limited partnerships), mortgage REITs, and BDCs perform well in flat or falling interest rate environments, and lag in rising interest rate environments. And when we say a rising rate environment, it doesn't just have to be the Fed raising rates, the 10 Year going up certainly counts.
Since MLPs and other high-yield stocks are viewed as yield instruments, they are often priced in comparison to Treasuries, and there is a risk spread attached. For example, midstream MLPs with large fee-based businesses, like Kinder Morgan (NYSE: KMP - News), during normal times might have an average risk spread of 200-250 basis points over the 10-Year Treasury, while natural gas gathering and processing MLPs, like Copano (Nasdaq: CPNO - News), might typically have a risk spread of 300-400 basis points over the 10 Year, given their commodity exposure and more risky nature, all else being equal.
Depending on how risk tolerant or risk adverse the market is feeling, the risk spread can fluctuate. Currently, the 10 Year is yielding around 3.40%, having risen from about 2.50% in early November. Over that same period, the Alerian MLP Index has been about breakeven.
If Treasury prices start to rise, either a stock's risk spread needs to shrink, the company needs to increase its dividend in order for its yield to rise, or the stock price needs to fall in order to keep the same balance."
http://finance.yahoo.com/news/How-Inter ... l?x=0&.v=1
How Interest Rates will impact MLPs in 2011
Re: How Interest Rates will impact MLPs in 2011
I believe a lot of U.S. investors will be pulling money out of the, now taxable Canadian Royalty Trusts and moving it into the upstream MLPs during the 1st quarter.
Also, it is important to look at upstream MLPs differently. At EPG, we are focused on finding those with significant growth potential. Upstream MLPs offer a 2% to 3% higher yield than the midstream MLPs. Upstream MLPs do have arguably higher risk since they cannot lock in revenues by hedging for as long as the midstream MLPs can with their contracts. Make sure you look closely at their hedging programs before you invest. Don't just pick the one with the highest yield.
Premium Members investing for yield should look over our "MLP Watch List" and read the profiles on the individual companies.
Matt Denegre, an SMU graduate student, tracks the MLPs for us and he updates the MLP Watch List each week.
Also, it is important to look at upstream MLPs differently. At EPG, we are focused on finding those with significant growth potential. Upstream MLPs offer a 2% to 3% higher yield than the midstream MLPs. Upstream MLPs do have arguably higher risk since they cannot lock in revenues by hedging for as long as the midstream MLPs can with their contracts. Make sure you look closely at their hedging programs before you invest. Don't just pick the one with the highest yield.
Premium Members investing for yield should look over our "MLP Watch List" and read the profiles on the individual companies.
Matt Denegre, an SMU graduate student, tracks the MLPs for us and he updates the MLP Watch List each week.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group