It’s been a wild ride in bonds.
Back in September, the 10-year Treasury note yielded just 2%. Today, the yield is hovering close to 3%. While it might not seem like that big of a deal at first glance, we’re talking about a move of nearly 50%.
Rising bond yields means falling bond prices. And it also means falling prices for anything that gets a large chunk of its total returnrn from dividends or interest.
As a case in point, midstream oil and gas master limited partnerships (MLPs) are high-yielding stocks that have traditionally been popular with income investors. Over the past 12 months, the sector is down by 18%, putting it close to bear market territory.
Mr. Market is the temperamental sort, and this looks like a classic overreaction.
Today, the Alerian MLP index, the leading gauge of energy MLPs, yields an almost hard-to-believe 8.01%. The 10-year Treasury yields 2.88% as I write. That means that MLPs as a sector trade at a 5.13% spread over Treasurys.
To put that in perspective, only twice in the past 20 years have MLPs have been cheaper relative to Treasurys – the 2008 meltdown, when the world appeared to be ending, and the 2015 energy crisis.
MLPs have never been this cheap during “normal” market conditions.
I’ve been nibbling at the sector in Boom & Bust and in my income service Peak Income.