Below are charts showing how prominent high yield groups & the Treasury bond yields have fared in the last year. The high yield group sold off sharply in the post Lehman period as frightened investors pursued safety at any cost. For example, Treasury bonds had an enormous rally slashing their yield from above 4% to almost 2% by late last year. The high yield sector plunged while treasury securities soared.
However, during the last 3 months when stocks, & especially high yield securities recovered losses, Treasuries have plunged (despite large purchases by the Federal Reserve) bringing their yields back to near where they were before the market collapse. On the margin, money flowed from the safety of Treasuries to risky high yield investments.
Enthusiasm to accept added risk for high current income may be overextended. The recovery is not beginning quickly. As much as I like them, a very rough period lies ahead for these securities. The tepid performance of the REITs in the last couple of months reflects my views. Vacancy rates on rental leases are expected to rise. Substantially higher junk bond default rates are coming. However, MLPs are harder to figure out because they really don't report how well they are covering distributions. Distribution cuts have been limited so far. Last week, more offerings of units (including the premier Kinder Morgan, KMP) were sold to raise needed capital. Tough times lie ahead for these securities which have the potential to arrive as a rude shock to investors.
Alerian MLP Index --- 1 year
Dow Jones REIT Index --- 1 year
Barclays Capital High Yld Bond - 1 year
10-Year Treasury Yield Index - 1 year
2 comments:
Why do you feel the MLP's are in for tough times
Ben,
Partially because they seem to have come thru a tough period without suffering pain & I want to have a better understanding of their distributable cash flow per unit which covers distributions.
Avi
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