No doubt that master limited partnerships have been a market leader since the bull market in them began in December of 2008. With a four-month lead of the rest of the market, the index has more than doubled and is now shooting above 400. So while all seems right with the world of MLPs, let us examine what could possibly go wrong.
MLPs perform well in general in a world of flat or falling rates. Specifically with the 10-year rate the yield spread between the two is usually between 2 and 3 basis points. However, since the market collapse of 2008, spreads have never been back to that range and instead have been closer to 350-400 basis points for the strongest MLPs like Kinder Morgan (KMP) and Enterprise Products Partners (EPD). Note that the 10-year chart above seems to be putting in some sort of bottom. In other words, bond prices may be (finally?) putting in a final long-term top in prices. Granted that many people have gone broke calling that top for the last two years but this bottoming pattern in yields does look a bit more impressive in nature.
Now there are two ways we can look at this bottoming process. It could be a signal that the economy is on the mend and that all will be right with the world at least for awhile.
If this is the case then MLPs don’t have much to worry about and can continue their rally at least for awhile.
(Click to enlarge)
The weekly chart above is certainly not signaling any kind of stress and in fact has begun another up leg. Perhaps the fact that MLPs continue to rally could be telling us that the 10-year bottom formation is not real and that rates will remain at best confined to a range between 1.75 and 2.25 for quite awhile in which case MLPs will just continue to grow distributions every quarter forever and ever. Still there is food for thought here as to where we will be going in the next few quarters.