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 return 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.