The yield on the 10-year Treasury bond has inched up about half a percentage point from its 2011 low–not enough of a move to call a bear market. But inventories of Treasury securities are building up at bond dealers, even as investors grow less fearful about the stock market’s prospects and more concerned about the Federal Reserve’s accommodative monetary policy.

This confluence of developments heightens the risk that interest rates will climb in 2012.

That’s bad news for bondholders. High-quality corporate issuers have enjoyed extraordinarily low costs of capital for the better part of three years. In this environment, even junk-rated companies have taken advantage of ultra-low rates to slash interest costs, eliminate refinancing risk and lard their balance sheets with inexpensive capital.

If the cost of corporate borrowing were to revert to historical norms, bondholders would suffer a substantial loss of capital. Closed-end funds and other investment vehicles that have taken on excessive leverage to boost their payouts to investors will also feel the pain.

Conventional wisdom holds that rising interest rates would also drive investors out of master limited partnerships (MLP) and other income-oriented stocks, saddling those who opt to stay the course with capital losses.

The opposite has occurred since the end of 2007. The Alerian MLP Index, which tracks the 50 largest energy-related MLPs, plummeted to a 41.6 percent loss in 2008, then surged 61.9 percent in 2009 and posted a 27.4 percent gain in 2010. The index overcame a midyear selloff in 2011 to return 7.3 percent to investors and is up 1.8 percent thus far in 2012.

Source: Bloomberg

In contrast, the Chicago Board Options Exchange 10-Year T-Note Index–the yield to maturity of the most recently auctioned 10-year Treasury note times a factor of 10–plunged sharply in 2008, as investors abandoned stocks for the safety of Treasuries. In 2009 the yield on 10-year Treasury securities surged, as investors piled into stocks after realizing that financial Armageddon had been avoided.

But bonds rallied hard once again during the summer swoon of 2010, when deteriorating US economic data and rising concern about the EU sovereign-debt crisis sent investors scurrying to safer fare. By the end of the year, the flow of capital reversed, with improvements in the US economy prompting investors to shift funds to equities and other riskier assets.

In 2011 Treasury yields plunged once again, compliments of renewed worry about the EU sovereign-debt debacle and another soft patch for the US economy, before rising again as the stock market rallied into year-end.

Source: Bloomberg

The Cliff’s Notes version: The Alerian MLP Index has posted strong returns when interest rates have ticked up; when interest rates have trended lower, the benchmark index has tumbled. That is, MLPs’ stock prices have responded more to trends in the equity market than movements in interest rates.

In the current environment, the Alerian MLP Index’s fortunes have closely followed trends in the domestic economy, rallying when investors become more optimistic about the prospects for growth.

That’s not to suggest that higher interest rates won’t affect MLPs, which rely on the capital markets to finance acquisitions and organic growth projects. Access to low-cost debt and equity capital has fueled distribution growth and enabled MLPs to construct the necessary infrastructure to support the frenzied drilling activity in US shale oil and gas plays.

But interest rates are unlikely to rise meaningfully until the economy recovers. Our forecast calls for US gross domestic product to grow haltingly and at a subdued rate in the next few years.

Meanwhile, robust demand for takeaway capacity in prolific shale oil and gas plays shows no sign of slowing. MLPs continue to secure ample contract coverage before breaking ground on new midstream infrastructure, locking in reliable income streams that will support distribution growth.

Inexpensive financing and a full slate of growth opportunities have enabled several of our favorite MLPs to grow their quarterly payouts at an accelerated rate, pushing the stock prices to all-time highs.

Rising interest rates would threaten the bull market for energy-related MLPs, though blue-chip players such as Conservative Portfolio holding Enterprise Products Partners LP (NYSE: EPD) that enjoy superior access to capital will have a competitive advantage. At the same time, a stronger economy would improve the profitability of many projects, presumably offsetting some of the impact from higher interest rates.

Our favorite MLPs continue to raise capital at favorable rates. Last month, BBB-rated Conservative Portfolio holding Kinder Morgan Energy Partners LP (NYSE: KMP) issued $1 billion worth of 10-year bonds at an interest rate of 3.95 percent. Our Portfolio holdings also continue to take advantage of high unit prices and investor demand to raise equity capital, though each new issue typically leads to a short-lived selloff in the stock.

As long as our Portfolio picks have access to cheap debt and equity capital, we can look forward to solid distribution growth. Instead of the daily babble about interest rates, investors should focus on company-specific developments–that’s what will tip us off to deteriorating business conditions.

A Note on Valuation

Of late, we’ve received a number of questions from subscribers about the recent pullback in the unit prices of Sunoco Logistics Partners LP (NYSE: SXL), Kinder Morgan Energy Partners LP (NYSE: KMP) and other names that have run up considerably during the recent rally.

In the previous two issues of MLP Profits, we emphasized that investors should resist the temptation to overpay for Portfolio holdings that trade above our buy targets. This caveat stands. Many investors are chasing performance rather than seeking value–don’t fall into this trap. Adhering to our buy targets will ensure that you don’t accept an inferior distribution yield.

With the US economy growing at a slow rate and Europe’s sovereign-debt crisis far from resolved, investors are pricing income-oriented stocks according to their near-term perceptions of economic and market risks. Recall the buying opportunities that abounded during the summer swoons of 2010 and 2011. Investors who hold out for a correction can pick up units of high-quality MLPs at prices that virtually ensure robust long-run returns.

We’ve also underscored repeatedly the importance of rebalancing your portfolio and taking some profits off the table in your biggest winners. In these uncertain times, turning some of your paper returns into real profits will provide you with dry powder to invest in names that trade below our buy targets. You can also hold your proceeds in reserve and use these funds to repurchase the stock that you sold once it pulls back to a reasonable valuation.

Portfolio Roundup

The key takeaways from our fourth-quarter results and guidance for the upcoming year: Our picks are in good health and should post solid cash flow growth in 2012.

That being said, we also had our first misstep in the model Portfolios. Former Growth Portfolio holding Inergy LP (NYSE: NRGY) announced that it would slash its distribution to reflect a sizable decline in the amount of cash flow generated by its propane distribution business.

However, our decision to cut our losses in Inergy and add the recently spun-off Inergy Midstream LP (NYSE: NRGM) to the Growth Portfolio should pay off. This swap maintained our exposure to the midstream assets that first attracted us to Inergy while eliminating the uncertainty associated with the former’s flagging propane business.

We expect Inergy Midstream to grow its distributions at an annualized rate of 5 percent to 10 percent over the next few years. The MLP’s full slate of expansion projects will fuel much of this growth, though the firm could also use the $420 million remaining on its revolving credit line to pursue bolt-on acquisitions in the Northeast.

Despite its solid asset base and growth potential, Inergy Midstream sports a higher yield than peers with similar risk profiles. Take advantage of this unwarranted discount and buy Inergy Midstream LP up to 23.

Despite the strength of our Portfolio holdings’ fourth-quarter results, future stumbles are a risk in these uncertain times. The best defense is to diversify your portfolio and keep close tabs on quarterly results and business conditions for signs of weakness.

Here’s where you can find our analysis of fourth-quarter results for each stock in the model Portfolios.

Buckeye Partners LP (NYSE: BPL)–March 1 Issue

DCP Midstream Partners LP (NYSE: DPM)–March 1 Issue

Eagle Rock Energy Partners LP (NSDQ: EROC)–March 1 Issue

El Paso Energy Partners LP (NYSE: EPB)–March 1 Issue

Enterprise Products Partners LP (NYSE: EPD)–Feb. 8 Flash Alert

Energy Transfer Partners LP (NYSE: ETP)–Feb. 16 Flash Alert

Genesis Energy LP (NYSE: GEL)–Feb. 16 Flash Alert

Inergy Midstream LP (NYSE: NRGM)–Jan. 31 Issue

Kinder Morgan Energy Partners LP (NYSE: KMP)–Jan. 31 Issue

Legacy Reserves LP (NSDQ: LGCY)–March 1 Issue

Linn Energy LLC (NSDQ: LINE)–March 1 Issue

Magellan Midstream Partners LP (NYSE: MMP)–Feb. 8 Flash Alert

Mid-Con Energy Partners LP (NSDQ: MCEP)–March 1 Issue

Navios Maritime Partners LP (NYSE: NMM)–Jan. 31 Issue

Penn Virginia Resource Partners LP (NYSE: PVR)–March 1 Issue

Regency Energy Partners LP (NYSE: RGP–Feb. 16 Flash Alert

Spectra Energy Partners LP (NYSE: SEP)–Feb. 8 Flash Alert

Sunoco Logistics Partners LP (NYSE: SXL)–Jan. 31 Issue

Targa Resources Partners LP (NYSE: NGLS)–March 1 Issue

Teekay LNG Partners LP (NYSE: TGP)–March 1 Issue

Vanguard Natural Resources LLC (NYSE: VNR)–April 2 Issue

Our reporting of these results was strung out over several months, largely because of the complex filing requirements associated with the end of the fiscal year. In contrast, we won’t have to wait as long for our Portfolio holdings to report first-quarter results. The estimated dates that these MLPs will release quarterly earnings are listed below.

Buckeye Partners LP (NYSE: BPL)–May 7

DCP Midstream Partners LP (NYSE: DPM)–May 7

Eagle Rock Energy Partners LP (NSDQ: EROC)–May 7

El Paso Energy Partners LP (NYSE: EPB)–May 4

Enterprise Products Partners LP (NYSE: EPD)–May 10

Energy Transfer Partners LP (NYSE: ETP)–May 4

Genesis Energy LP (NYSE: GEL)–May 10

Inergy Midstream LP (NSDQ: NRGM)–April 30

Kinder Morgan Energy Partners LP (NYSE: KMP)–April 20

Legacy Reserves LP (NSDQ: LGCY)–May 4

Linn Energy LLC (NSDQ: LINE)–April 27

Magellan Midstream Partners LP (NYSE: MMP)–May 4

Mid-Con Energy Partners LP (NSDQ: MCEP)–June 6

Navios Maritime Partners LP (NYSE: NMM)–April 20

Penn Virginia Resource Partners LP (NYSE: PVR)–April 26

Regency Energy Partners LP (NYSE: RGP)–May 4

Spectra Energy Partners LP (NYSE: SEP)–May 4

Sunoco Logistics Partners LP (NYSE: SXL)–April 26

Targa Resources Partners LP (NYSE: NGLS)–May 4

Teekay LNG Partners LP (NYSE: TGP)–May 11

Vanguard Natural Resources LLC (NYSE: VNR)–May 10

We’ll review and analyze these quarterly earnings in Flash Alerts and regular issues. In the meantime, here’s a rundown of recent developments affecting our Portfolio holdings and our updated take on each stock.

Units of Buckeye Partners LP (NYSE: BPL) have pulled back by 1.4 percent in the new year but have ticked up slightly since we added the stock to the Conservative Portfolio on March 2, 2012.

The big question hanging over the stock is how quickly the assets acquired last year will prove accretive to cash flow and alleviate investors’ concerns about the MLP’s slim distribution coverage ratio. The cost of acquisitions and organic growth projects, some of which was funded by issuing new units, weighed on the Buckeye Partners’ results.

Capacity on the MLP’s core oil-product pipelines was well over-subscribed in March; strong demand doesn’t necessarily ensure profitability, but it’s an encouraging sign. The analyst community is divided on Buckeye Partners’ prospects: five rate the stock a “Buy,” four rate the stock a “Hold” and two rate the stock a “Sell.” In our estimation, Buckeye partners LP is a buy up to 65.

DCP Midstream Partners LP (NYSE: DPM) posted stellar returns in 2011, largely because of its rapidly growing NGL-related business lines. The stock is up 0.4 percent in 2012 and trades at a lofty valuation. The MLP recently issued $350 million in 10-year notes at an interest rate of only 4.95 percent. Management used $135 million of the proceeds to pay off all outstanding borrowings under its credit agreement.

The firm also took advantage of its elevated stock price to sell 4.75 million units at $47.42 per in early March. At these levels, investors should consider taking some profits off the table and allocating the proceeds to a Portfolio holding that trades below our buy target. Buy DCP Midstream LP when the stock dips to less than 40.

Units of Eagle Rock Energy Partners LP (NSDQ: EROC) are down 8.5 percent in the new year but are up slightly since we added the stock to the Growth Portfolio on March 2, 2012.

The NGLs-focused company is coming off three consecutive quarterly distribution boosts that have yet to generate excitement among investors. The MLP recently exercised 3.159624 million warrants to buy units at $6 each, a move that enabled Eagle Rock Energy Partners to pay off a large chunk of outstanding borrowings on its credit facilities. The MLP continues to add new assets and improve its position to capitalize on rising demand for NGLs. Buy Eagle Rock Energy Partners LP up to 12.

El Paso Energy Partners LP (NYSE: EPB) joined the Conservative Portfolio on March 2, 2012, and the stock is up 2.9 percent since the beginning of the new year. Kinder Morgan Inc. (NYSE: KMI), which will become El Paso Energy Partners’ general partners after its takeover of El Paso Corp (NYSE: EP) closes, announced that it expects the MLP to grow its distribution at an average annual rate of 9 percent over the next five years.

This deal is expected to be consummated in May 2012. Drop-down transactions from Kinder Morgan Inc. should generate much of El Paso Energy Partners’ future cash flow growth. Backed by a strong general partner that knows how to maximize the value of its assets, El Paso Energy Partners rates a buy up to 38.

Units of Enterprise Products Partners LP (NYSE: EPD) have surged 11.1 percent thus far in 2012, ensuring that the stock continues to trade above our buy target of 45. Among the blue-chip MLPs, Enterprise Products Partners remains our favorite, thanks to its astute management team and impressive slate of upcoming growth projects. The MLP’s track record of completing asset expansions on time and on budget is a testament to the firm’s execution. We like management’s recent focus on building out fractionators and other NGL-related infrastructure in capacity-constrained plays.

That being said, no stock is a buy at any price. Buy Enterprise Products Partners LP when the stock dips to less than 45.

Energy Transfer Partners LP’s (NYSE: ETP) stock has returned 5.1 percent in 2012, maintaining its momentum from late 2011. The pending drop-down transaction of a natural gas pipeline system in Florida–a deal that will go through once its general partner Energy Transfer Equity LP (NYSE: ETE) completes the buyout of Southern Union (NYSE: SUG)–should fuel distribution growth. Energy Transfer Partners LP is a buy up to 50.

Units of Genesis Energy LP (NYSE: GEL) have appreciated by 13.6 percent this year, despite a brief pullback after announcing the sale of 5 million new units. The MLP will use the proceeds to repay borrowings on its credit facility. Insiders have been snapping up the stock aggressively in recent months. Investors should buy Genesis Energy LP on dips to less than 30.

Inergy Midstream LP (NYSE: NRGM) announced a major new venture with natural gas utilities UGI Corp (NYSE: UGI) and WGL Holdings (NYSE: WGL) to build a 200-mile, 30-inch, 800,000 dekatherms per day pipeline system to bring gas from the Marcellus Shale to markets in Pennsylvania and Maryland. We expect this project to generate solid cash flow my mid-decade.

The stock could also receive a boost after the MLP pays its first full distribution, at which point more financial websites will display the correct yield. Buy Inergy Midstream LP up to 23 and lock in a yield of almost 7 percent.

Units of Kinder Morgan Energy Partners LP (NYSE: KMP) have treaded water thus far in 2012, with investors awaiting Kinder Morgan Inc.’s acquisition of El Paso Corp to close. Kinder Morgan Energy Partners’ general partner has indicated that the MLP will grow its distribution at an average annual rate of 7 percent after this deal is completed. Drop-down transactions will generate much of this growth.

The MLP’s existing asset base continues to perform, with the oil-focused Kinder Trans Mountain Pipeline over-subscribed by 69 percent in March.

The only knock on Kinder Morgan Energy Partners right now is the stock price, which trades well above our buy target. Some readers have asked if the recent pullback in the unit price is symptomatic of a bigger problem at the company. We chalk up this correction to profit-taking after investors bid up the stock. Buy Kinder Morgan Energy Partners when the stock dips to less than 80.

Legacy Reserves LP’s (NSDQ: LGCY) stock has returned 5.2 percent this year, a strong performance for an upstream MLP in a year when many investors are convinced energy prices could lower. The company continues to find ways to reduce costs and grow production–all keys to further distribution growth. Buy Legacy Reserves LP up to 32.

Units of Linn Energy LLC (NSDQ: LINE) are up 2 percent this year, despite the company splashing out $1.4 billion on acquisitions. Some investors may disapprove of management’s recent focus on acquiring natural gas reserves. However, management has hedged 100 percent of the LLC’s natural gas production in coming years, and the assets acquired in East Texas and the Hugoton Basin should generate a reasonable rate of return and prove accretive to cash flow in 2012.

Despite earning a B credit rating, the upstream LLC issued $1.8 billion worth of seven-year senior notes at a coupon of 6.25 percent. Buy Linn Energy LLC up to 40.

Magellan Midstream Partners LP (NYSE: MMP) is another stock that investors have bid up to overbought levels.

Management continues to have no problem raising funds or finding worthwhile projects in which to invest. For example, the MLP will expand the capacity of its pipeline that connects Crane, Texas, to Houston to 225,000 barrels of oil equivalent per day, up from 135,000 barrels of oil equivalent per day. This project will help alleviate the glut of oil at the hub in Cushing, Okla.

But insiders have taken advantage of the stock’s recent strength to cash out. Yielding only 4.5 percent after the recent rally, units of Magellan Midstream Partners LP only rate a buy on dips to less than 60. Investors who have substantial gains in this stock should consider taking some profits off the table.

Units of Mid-Con Energy Partners LP (NSDQ: MCEP) have gained more than 25 percent this year, reflecting excitement about the firm’s potential to grow production from its low-risk, oil-weighted asset base. Yielding more than 8 percent, units of Mid-Con Energy Partners LP rate a buy up to 26.50 for those who don’t own them already.

Navios Maritime Partners LP’s (NYSE: NMM) stock has rallied 15.8 percent in the new year, but the units still yield upward of 10 percent, largely because of worries about the dry-bulk tanker industry and the health of any company headquartered in Greece.

This segment of the seaborne shipping market remains oversupplied, and some worry that the flow of commodities to China will slow in coming months. The distribution, however, remains well protected by long-term contracts that guarantee cash flow. As long as day-rates in the market for dry-bulk tankers improve in the next several years, Navios Maritime Partners should be able to sustain its distribution.

Greece’s travails also have yet to limit the MLP’s ability to raise capital. Buy Navios Maritime Partners LP up to 20.

Penn Virginia Resource Partners LP’s (NYSE: PVR) stock is off slightly this year, likely because of concerns about the health of the global coal market and US electric utilities switching to cheaper, cleaner natural gas. That being said, the stock has outperformed other MLPs with exposure to the coal markets because of its growing midstream business in the Marcellus Shale. A wave of insider buying and a secure distribution make Penn Virginia Resource Partners LP a buy up to 29.

Units of Regency Energy Partners LP (NYSE: RGP) are flat on the year, as the sale of 11 million units to pay down debt took the air out of the stock’s sails–at least temporarily. The underwriters also have the option to pick up another 1.65 million units. The MLP will use the proceeds to buy back up to 35 percent of the principal of its 9.375 percent notes due in 2016. We suspect the unit price will recover once general partner Energy Transfer Equity completes its takeover of Southern Union. Yielding 7.5 percent units of Regency Energy Partners LP rate a buy up to 29.

Spectra Energy Partners LP’s (NYSE: SEP) stock is up slightly in the new year. Only two of the 14 Wall Street analysts covering the MLP rate the units a “Buy,” while 10 have the stock as a “Hold,” suggesting that the stock trades at fair value. Another drop-down transaction from its general partner could provide an upside catalyst. Conservatively run, Spectra Energy Partners LP rates a buy up to 33.

Sunoco Logistics Partners LP (NYSE: SXL) continues to trade well above our buy target; investors sitting on substantial gains should consider taking some profits off the table. We’re bullish on the MLP’s asset base and ability to grow its cash flow and distribution. But at these levels, the stock is overbought. Buy Sunoco Logistics Partners LP up to 32.

Targa Resources Partners LP’s (NYSE: NGLS) stock is up 15.5 percent this year, reflecting growing demand for NGL takeaway and processing capacity. Drop-down transactions from the firm’s general partner will also contribute to growth. But at these levels, the stock appears overbought; buy Targa Resources Partners LP when the units fall to less than 35.

Up 20.3 percent, Teekay LNG Partners LP (NYSE: TGP) is our biggest winner this year, as investors have begun to recognize that the market for tankers that ship liquefied natural gas has continued to tighten. Management’s conservative bent and focus on long-term contracts should continue to pay off for unitholders. Buy Teekay LNG Partners LP up to 41.

Vanguard Natural Resources LLC (NYSE: VNR) was the final Portfolio holding to report fourth-quarter and full-year results.

The limited liability company (LLC) will tackle the integration of Encore Energy Partners in 2012. Following the divestment of the oil and gas producer’s Appalachian assets–a deal that essentially cancelled units held by co-founder investor Majeed S. Nami–Encore Energy Partners’ acreage accounts for roughly 52 percent of the combined firm’s total reserves. The acquired assets are heavily weighted toward oil and NGLs, and we expect the new owner to extract substantial value from this acreage.

The deal closed in December, which means that management’s comments on the LLC’s fourth-quarter performance offered little guidance on how the integration will proceed. However, the addition of these reserves should boost the combined company’s production and average price realizations.

During the fourth quarter, Vanguard Natural Resources’ distributable cash flow (DCF) surged by 120 percent from year-ago levels and 95 percent sequentially, enabling the LLC to cover its quarterly payout by a 1.4-to-1 margin. With cash flow likely to grow significantly in the coming year, we expect management to approve additional distribution increases in 2012.

Fourth-quarter production soared to 13,405 barrels of oil equivalent per day, with liquids output surging to 85 percent of overall revenue–up dramatically from 52 percent in 2009. The addition of Encore Energy Partners’ assets also expands Vanguard Natural Resources’ liquids-focused drilling inventory and the potential for bolt-on-acquisitions in adjacent acreage.

Vanguard Natural Resources has also established a sizable position in the Williston Basin, home to the Bakken Shale and considerable amounts of light oil.

Even after closing the acquisition of Encore Energy Partners, the LLC is still relatively small and could be a potential takeover candidate.

The stock price is up 4.9 percent on the year, lagging several peers. Some if this underperformance likely reflects integration risks, while some investors have failed to factor in the firm’s shifting production mix and overestimate the LLC’s exposure to depressed natural gas prices.

Management expects the company’s liquids output to increase by 12 percent in 2012, though reduced drilling activity in dry-gas plays will lead to flat overall production A solid hedge book means that the firm’s exposure to natural gas isn’t much of a concern.

At the same time, the management team has indicated that it would consider a deal to increase its exposure to natural gas, provided that the valuation offered attractive returns.

The big question hanging over the stock: Whether Vanguard Natural Resources will be able to grow production from Encore Energy Partners’ acreage, especially after the MLP’s former general partner Denbury Resources (NYSE: DNR) opted to slash investment in these properties

With the disposal of the firm’s Appalachian acreage, the answer to this question will have a profound effect on Vanguard Natural Resources’ profitability and stock price.

With a distribution yield of 8.3 percent, the stock appears to price in this risk. Buy Vanguard Natural Resources LLC up to 30.