December 9, 2019
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, while offering comparable yields and spreads.
- Portfolio managers are considering strategies to extend duration and call structures to neutralize asset sensitive interest rate risk profiles and to protect against falling rate exposures.
- The December fixed-rate SBA DCPC auction last Thursday included 20-year and 25-year maturities.
- For the fifth consecutive month issuance in the 25-year term exceeded the 20-year term. Issuance for the 25-year term totaled $196.1M in December, while the 20-year term totaled $146.6M. Total issuance in the December auction of $342.8M declined $30.9M (-8.3%) compared to November issuance of $373.7M.
- Yield spreads remain tighter than the twelve-month average and both maturity terms tightened 1 bp month over month (57 bps yield spread for the 25-year term and 45 bps for the 20-year term).
- Current yield spreads on newer and seasoned SBA DCPCs and SBICs are pricing at approximately 58 bps or wider to Treasuries (I-curve).
Floating-Rate 7(a) Pools
- With the Fed likely on hold for the foreseeable future after another 25 bp rate cut, floating rate bonds may see a pickup in activity as part of barbell portfolio strategies.
- SBA floating-pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities compared to 3-month T-Bills.
- It is critically important to evaluate pools at a wide variety of speeds and 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 activity was slow last week as supply remains a challenge, 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