How Interest Rates will impact MLPs in 2011
Posted: Wed Dec 29, 2010 12:57 am
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
"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