August 12, 2019
The August fixed-rate DCPC auction last week drew strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to protect against falling rates. For the first time since the introduction of the 25-year term in July 2018, issuance in the longer term exceeded the 20-year term.
Fixed-Rate DCPC Pools
- Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives.
- The August fixed-rate DCPC auction included 20- and 25-year maturities.
- Issuance declined and spreads tightened in August for all maturity terms compared to the prior month.
- Issuance in the August auction decreased $11.7M (-3.6%) compared to July.
- Issuance for the 25-year term totaled $166.6M in August, while the 20-year term totaled $143.9M.
- Yield spreads are currently tighter than the twelve-month average for all maturities and are trading at the tightest spread levels over the last year.
- Yield spreads versus Treasurys tightened 6 bps in the August auction for both 20-year and 25-year maturities.
Floating-Rate 7(a) Pools
- SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities compared to 3-month T-Bills.
- Many floating-rate bond options currently offer similar and even higher yields than longer duration fixed-rate bonds, driven by an inverted yield curve between 3-month and 10-year Treasurys.
- SBA prepayment speeds for SBA 7(a) pools will be released later this week.
- SBA 7(a) Equipment and Real-Estate pools posted minor declines in prepayment speeds for the second month in a row last month.
- 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 loan trading was light last week as limited availability of supply has impacted activity recently, while demand for these loans remains high. 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