Investor anxiety over inflation and the potential impact of rising interest rates has continued to intensify, with recent geopolitical tensions further inflaming investor sentiment.
Looking to midstream, investors often wonder if the sector’s high distribution yields tend to help or hurt performance during periods of rising rates.
“While there have been short-term periods of weakness in response to dramatic rate moves, we find that over long-term periods, midstream equities, specifically MLPs, have not demonstrated meaningful correlation to interest-rate changes,” according to Brian Watson, portfolio manager and director of MLP research at Invesco.
According to Watson, there have been six periods over which interest rates have increased by at least 100 basis points over the past fifteen years.
The yield on the 10-year U.S Treasury increased by 190 bps in the wake of the 2008 financial crisis. Over this period, MLP equities, as measured by the Alerian MLP Index (AMZ), appreciated 29%, while utilities and REITs declined 5% and 3%, respectively.
From late 2010 to February 2011, the 10-year yield increased by 134 bps. Over this period, the AMZ appreciated 8% while utilities and REITs increased 3% and 8%, respectively, according to Watson.
From June 2012 until September 2013, the 10-year yield increased by 154 bps. Over this period, the AMZ appreciated 10% while utilities and REITs each fell 2%, according to Watson.
From July 2016 through the end of January 2017, the 10-year yield increased by 123 bps. Over this period, the AMZ declined 3% while utilities and REITs declined by 8% and 9%, respectively, according to Watson.
From September 2017 through October 2018, the 10-year yield increased by 118 bps. Over this period, the AMZ declined 1% while utilities and REITs declined 1% and 5%, respectively, according to Watson.
And finally, from August 2020 to March 2021, the 10-year yield increased 122 basis points while the AMZ was up 27% while utilities rose 6%, and REITs increased 15%, according to Watson.
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