Dump U.S. Treasuries For MLPs $EPD $KMP $PAA $ETE $ETP $MMP $LINE $OKS $KMR $EEP
The current spread between the yield of the Alerian MLP Index (AMJ) and the 20 Year U.S. Treasury of 388 basis points (3.88%) compared to a 16 year average of 258 basis points (2.58%) argues that the MLPs in the AMJ index are not overvalued.
When/if that spread compresses to less than 100 basis points (1.00%), then we need to worry. The current AMJ yield of 6.29% is towards the lower end of the distribution of AMJ Yields over the same time period, indicating that AMJ Index MLPs are relatively fully valued.
The purpose of this AMJ Yield Spread to Treasury (“AMJ Yield STT”) analysis is to look at the relative yields of the Alerian MLP index and the 20 Year U.S. Treasury to determine if the spread can indicate when MLPs are relatively overvalued.
According to the Alerian website, “The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships that provides investors with an unbiased, comprehensive benchmark for this emerging asset class.”
The top 10 constituents of the index are (drum roll please!):
1. Enterprise Products Partners, LP (EPD)
2. Kinder Morgan Energy Partners, LP (KMP)
3. Plains All American Pipeline, LP (PAA)
4. Energy Transfer Equity, LP (ETE)
5. Magellan Midstream Partners, LP (MMP)
6. Energy Transfer Partners, LP (ETP)
7. Linn Energy, LLC (LINE)
8. Oneok Partners, LP (OKS)
9. Kinder Morgan Management, LLC (KMR)
10. Enbridge Energy Partners, LP (EEP)
The top 10 currently represent approximately 60% of the total index, so the index is heavily weighted towards the largest MLPs. This analysis uses weekly data starting from December 29, 1995 (the earliest data for the AMJ Index). The 20 Year U.S. Treasury yield is used because it has the highest correlation with the AMJ Yield over the time frame studied. The 20 year U.S. Treasury has a correlation coefficient of 43.9% and a coefficient of determination (R-squared) of 0.192 (many people default to look at the 10 year U.S. Treasury, and that comes in at a slightly lower correlation coefficient of 40.0% and an R-squared of 0.16)
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