The sector of Master Limited Partnerships (MLPs) is far from immune to a rising interest rate environment. The theory is simple enough: investors can reach for 50, 100, or 200 basis points more in yields from longer-dated Treasury Notes and Bonds then they are likely to scale out of the riskier sectors which have been distributing high dividends or high payouts when interest rates have been so low. We have seen this in junk bonds, REITs and in MLPs of late where investors have already started their exodus.
Please note: This article was updated to reflect closing bell prices.
What has happened with MLPs is that the sector has been under pressure for more than a week. The key exchange-traded product we track in this sector is the JPMorgan Alerian MLP Index ETN (NYSE: AMJ), and its price has fallen in each and every session for six days in a row before Thursday’s trading. Will the selling trend be snapped on Thursday as shares of this ETN is actually up 0.9% at $44.51 in mid-afternoon trading against a 52-week trading range of $35.83 to $49.31. If the last distribution remains static, the “yield-equivalent” is about 4.85%. Closing price Thursday: up 2.86% at $45.35
We are also seeing the same six-day streak in the closed-end fund Kayne Anderson MLP Investment Company (NYSE: KYN), although that could more easily be a 7-day losing streak because mid-day trading on Thursday is down 7-cents at $34.75 versus a 52-week range of $27.25 to $39.07. The yield equivalent here is 6.5% but we would caution that this closed-end fund does use leverage to control more assets. Shares closed up 3-cents at $34.85 to break its streak.
One of the key drivers on Thursday is Enterprise Products Partners L.P. (NYSE: EPD) as the largest of the MLP with a market cap of almost $54 billion. Its “yield equivalent” distribution is still somewhat low compared to other MLPs at 4.5%, but the units are up 1.4% at $59.35 against a 52-week range of $47.26 to $63.56. Closing update: Units closed up 1.44% at $59.36.
Another gain is being seen in units of Kinder Morgan Energy Partners, L.P. (NYSE: KMP) with a gain of 0.9% at $82.86. Its 52-week range is $74.59 to $92.99 and its “yield equivalent” distribution screens out at 6.2% as of now. Units closed up 2.3% at $84.03.
One ETF which has not followed the every day drop is Global X Junior MLP ETF (NYSE: MLPJ), although it is down 1-cent at $15.53 against a post-launch range of $15.09 to $16.37. Be advised that this ETF is much more thinly traded and has a yield around 7.2% if that remains static. The ETF closed up 3-cents at $15.57.
We have been featuring the interest rate sensitive sectors with frequency so that investors are not caught off balance when rates really do start to rise again (whenever that may be). From trough to the peak of the rate rise, the move in longer yields was only about 60 basis points. Imagine what could happen to the pricing here if rates rose 150 basis points or 250 basis points.