April 15, 2019
The April fixed-rate DCPC auction last week included 20 and 25yr maturities. Issuance increased 34% MoM, while yield spreads versus Treasuries tightened 5 to 6bps. SBA prepayment speeds for SBA 7(a) pools paid at faster speeds in April than in the prior month.
Fixed-Rate DCPC Pools
Fixed-rate DCPC pools and SBIC fixed-rate debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- The April fixed-rate DCPC auction last week included 20 and 25yr maturities.
- Issuance in the April auction improved compared to the prior month.
- Issuance totaled $369.3M in April and $275.6M in March, an increase of 34% MoM.
- Issuance for the 20yr term totaled $199.3M in April, while the 25yr term increased to $170.0M; the largest issuance for the 25yr term since its first issuance in July 2018.
- Yield spreads versus Treasuries tightened 5 to 6bps in the April auction compared to the prior month for the 20yr and 25yr terms.
- Yield spreads are currently below the twelve-month average for the 20 and 25yr terms.
Floating-Rate 7(a) Pools
- SBA floating-rate pools trading to financial institutions last week primarily included 10-year equipment pools at higher premiums.
- With 90-day Treasuries trading at a yield of 2.42% many floating-rate bond options currently offer similar and even higher yields than longer duration fixed-rate bonds, driven by a flat yield curve between 3-month and 10-year Treasuries.
April SBA Prepayment Speeds
- SBA prepayment speeds for SBA 7(a) pools paid at faster speeds in April than in the prior month. Equipment pools broadly increased from 14.5 to 18.8 CPR. Real-Estate speeds came in 1 CPR faster at 16.6 CPR after they were virtually flat last month. The overall trend since peaking last November has been a slowdown in CPRs for both Equipment and Real-Estate pools.
- It is critically important to evaluate pools at a wide variety of speeds and also using a prepayment vector. Our Performance Profile includes an analysis of your 7(a) pools layered against a historical prepayment vector. Please let your Representative know if you would like to run a Performance Profile.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural FSA loans traded to financial institutions last week and improved availability of supply has contributed to trading activity recently. As has been the case for some time, supply and not demand limits loan trading volumes.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP