April 30, 2018
Activity in the SBA sector waned last week versus the prior very busy three weeks. Fixed-rate SBA volumes fell more than floaters, mostly as a function of the lack of auction-related activity. Floater activity gravitated toward lower-coupon bonds trading near par and new equipment-loan pools.
Floating-Rate 7(a) Pools
- Near-par offerings attracted some traditional buyers of floaters from other sectors last week, a likely response to relative value versus other high-quality floaters and the dearth of alternative uncapped floater offerings.
- While technical factors caused most of the March prepayment speed jump, some suppression of buying occurred as investors continue to adjust to the post-October prepayment trends they verified.
- Even though the market widely expects a short term rate-hike by the Fed sometime this quarter, many investors continue to conservatively use the current Prime rate in yield comparisons versus fixed-rate products and money markets. For example, the 113 to 114 price range equipment-loan pools currently yields well over 2% at expected prepayment speeds and the current Prime rate and also if it were to elevate to 2.25%.
Fixed-Rate (DCPC and SBIC) Pools
- More limited buying of both SBICs and DCPCs occurred last week as available volumes waned.
- SBIC spreads tightened a couple of basis points as supply more or less dried up, while DCPCs mostly held their spreads
- Fixed-rate SBA products still compare favorably to mortgage alternatives priced off the 5.5 to 7.5 year part of the curve.
- Flattening yield curves generally favor current cash flow over lockout. Fixed-rate SBA products therefore now compare favorably to many locked-out alternatives, such as agency multifamily products and CMO VADM tranches. As compared to most residential mortgage-backed securitizations, SBIC and DCPC prepayments are less closely correlated to market rates, and thus offer superior convexity profiles versus most residential offerings featuring current principal cash flows.
Government Guaranteed Loan Trading
- Heavy loan flows carried into last week, especially Monday through Wednesday.
- Demand for USDA and other government-guaranteed loans remains strong, while supply continues to limit volumes traded.
- The pace of 7(a) loan origination continues to favor greater pool issuance this business quarter.
A moderate amount of weekly volume for the SBA sector reflected a lack of fixed-rate issuance and perhaps a lack of a urgency for floater buyers. While SBA floaters should continue to enjoy the enhanced attention resulting from the upward path of short-term rates, many investors suspect the next hike will be later this quarter. Volume should pick up over the coming weeks with next week’s DCPC auction and also as a rate hike appears more imminent.
Director of Investment Product Strategies