December 18, 2017
Activity in the SBA sector was steady last week as the FOMC continued to tighten by raising the Fed Funds Target Rate by 25 bps. Bank portfolio managers looking for floating-rate exposure have looked to “par” priced SBA floaters to mitigate premium exposure. In addition, investors have added yield to their portfolios by adding DCPCs from the latest auctions. Loan activity continues to be strong in both 7(a) floating-rate loans and fixed-rate USDA government guaranteed loans, however activity is expected to lessen as year-end approaches.
Floating-Rate 7(a) Pools
- The FOMC voted for the third time in 2017 to hike its overnight target rate range to 1.25-1.50%. The hike was largely expected by the markets. Coupons on floating-rate SBAs will increase by 25 bps on January 1, 2018.
- As investors focused on the widely-expected December rate increase, portfolio managers continued to add variable-rate exposure to their portfolios. Activity focused on the addition of “par” SBA pools, priced at levels below 101. “Par” pools offer yields above that of Fed Funds, with limited premium risk. Levels observed last week were pools priced just shy of 101, yielding just north of 1.50%.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be healthy, as portfolio managers continue to add paper from the December DCPC issue to their portfolios. The December DCPC auction only included a 20-year maturity. The 20-year term was just over $275 million, the second smallest pool over the past year. The pool is comprised of 367 loans, with a fixed coupon of 2.78%, 45 bps over Treasuries.
Government Guaranteed Loan Trading
- Depositories have been focusing on bringing their government guaranteed loans to the secondary as year-end approaches. Both floating-rate SBA loans and fixed-rate loans have continued to see exceptional growth as the new fiscal year started on October 1st. Through the first 2 months of the SBA’s fiscal year of 2018 both 7(a) and DCPC loans are outpacing last year.
Portfolio managers continue to focus on reviewing their SBA floating-rate holdings and adding fixed-rate government guaranteed exposure to their existing portfolios. Loan activity continues to be strong in both 7(a) floating-rate loans and fixed-rate USDA government guaranteed loans, however activity is expected to lessen as year-end approaches.
Greg Roll, CFA
Senior Vice President