Why The Bond Bubble Is Very Dangerous To mREITs And MLPs

by: portfoliV

The mREITs and MLPs are high dividend-yielding stocks. They have become extremely popular, due to investors seeking the stability of dividends rather than the fluctuations of growth stocks. The popular stocks in these categories are:

mREITs and Mezzanine Finance: Annaly Capital (NLY), American Capital Agency (NASDAQ:AGNC), Invesco Mortgage Capital (IVR), Chimera (CIM), Hatteras Financial (HTS), KKR Financial (KFN), Ares Capital (ARCC), Starwood Property Trust (STWD), MFA Financial (MFA), CYS Investments (CYS), Prospect Capital (PSEC)

MLPs: Kinder Morgan Energy (KMP), Enbridge Energy (EEP), Energy Transfer Partners (ETP), Suburban Propane (SPH), Martin Midstream Partners (MMLP), Natural Resource Partners (NRP), Calumet Specialty Products (CLMT), AmeriGas (APU), Boardwalk Pipeline (BWP), Dorchester Minerals (DPM)

One characteristic that many of these stocks have in common is that they are extremely dependent on the interest rates staying low. However, the recent plunge in 10-year Treasury yields [IEF] might be troublesome for these stocks, in my opinion.

So why would a plunge in interest rates be problematic for these stocks, which benefit from lower rates?

The reason is the recent move in the 10-year yields have all the characteristics of a capitulation bottom. The move in yields is characterized by a very strong plunge in only 3 days between May 30th '12 and June 1st '12. Such a strong and unexpected move in yields will probably mark a medium-term bottom in rates. Also, as bond prices soar and make some bond traders very rich (and very quickly) most of those bond traders will attempt to realize profits pushing the yields back up.

It should be noted that capitulation bottoms are characterized by very strong gains after the bottom has been established. If this bottom is coupled with some sort of a solution to the Eurozone problems, Treasury prices might suffer on a medium-term downward trend that will take the 10-year yield close to 3%.

Even if the plunge in 10-year yields does not prove to be a capitulation formation and push-up the yields in the medium-term, it still brings a great deal of uncertainty to the Treasury interest rate environment. The 10-year yield has moved from 1.73% to 1.45% in only three days. Such uncertainty associated by those kind of erratic moves are not well-received by mREIT and MLP investors. The stability component of these stocks was what made these stocks so popular anyway. If the Treasury yields start to get erratic, the mREIT and MLP investors will probably be uncomfortable with the erratic moves and pull back.

Disclosure: I am short IEF.

Author's Note: For investors who decide that my analysis and trading suggestions are of good quality, I suggest using the "Follow" feature on SA. I have received some messages for more specific trading advice. I am hesitant to do that, since I am not a RIA in the U.S. I write articles about most of the trading opportunities I come across anyway. So the "Follow" feature is much more efficient.