MLPs And Interest Rates, How Right Is Mr. Gundlach? [View article]
Hi Philip,
Great article and I'm happy to be following you! The short answer to your question is 'yes,' but it's a little more complicated these days. In our view, US Treasuries hold just about zero relative value to cash, so in "relative terms" you aren't really gaining much advantage by making that comparison today. When it comes to cost of capital for assets that are highly leveraged, Treasury rates are obviously important. Not sure if that answers your question?
MLPs And Interest Rates, How Right Is Mr. Gundlach? [View article]
Hi Matt,
Neither your #1 nor #2 most important points are, in fact, the most important point. The single most important point with regard to how attractive an MLP is, or MLPs are, is their after-tax yield.
A great deal (60-100%) of an MLP's distributions are recorded as 'return of capital' and, as such, are tax-exempt. The remainder are taxed as ordinary income. If I'm a long-time municipal bond investor who has watched my risk- and tax-free interest income dwindle from 10+% all the way down to 2-3%, I'm suddenly very interested in the beneficial tax treatment the MLPs' distributions offer.
Historically, yes, the comparison of MLP yields vs. 10-yr Treasuries has been a relevant factor in determining MLP valuations. I think it's more interesting to consider what could happen if just 5-10% of the trillion dollar municipal bond market shifted towards the space....
It is extreme. I can't imagine there were too many people in 1983 who had $50k to put into a single stock that would be the slightest bit concerned about paying capital gains taxes along that ride in order to mitigate risk and diversify. There are also the considerations of tax deferred accounts (in which this entire discussion is moot) as well as tax loss harvesting and carry-forwards....
That's a fairly extreme example, though it does prove your point. If I had to go back 30 years and put cash to work in a single stock -- yes, KO would have been a good choice.
Thanks, TF. I suppose you're right, to some extent, that I'm promoting a bit of timing here -- what's the difference between timing and tactically allocating?
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Thanks for your comment, Rich. It's been an extremely painful 4-5 years, no doubt about it, but I agree with you that everyone should be encouraged by the signs of life we are now seeing across the board. As an investor, it certainly paid to get on that train several stops ago (before it was even considered a 'recovery')....
MLPs And Interest Rates, How Right Is Mr. Gundlach? [View article]
Great article and I'm happy to be following you! The short answer to your question is 'yes,' but it's a little more complicated these days. In our view, US Treasuries hold just about zero relative value to cash, so in "relative terms" you aren't really gaining much advantage by making that comparison today. When it comes to cost of capital for assets that are highly leveraged, Treasury rates are obviously important. Not sure if that answers your question?
Thanks again!
Adam
MLPs And Interest Rates, How Right Is Mr. Gundlach? [View article]
Neither your #1 nor #2 most important points are, in fact, the most important point. The single most important point with regard to how attractive an MLP is, or MLPs are, is their after-tax yield.
A great deal (60-100%) of an MLP's distributions are recorded as 'return of capital' and, as such, are tax-exempt. The remainder are taxed as ordinary income. If I'm a long-time municipal bond investor who has watched my risk- and tax-free interest income dwindle from 10+% all the way down to 2-3%, I'm suddenly very interested in the beneficial tax treatment the MLPs' distributions offer.
Historically, yes, the comparison of MLP yields vs. 10-yr Treasuries has been a relevant factor in determining MLP valuations. I think it's more interesting to consider what could happen if just 5-10% of the trillion dollar municipal bond market shifted towards the space....
Adam
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