February 20, 2018
Fixed rate SBAs and low dollar price floaters continued to comprise a large share of activity in the sector last week. Monthly prepayment speeds revealed consistency with every month since the October procedural change implemented by the SBA. SBA loan trading held pace, while diminished supply resulted in slower USDA loan activity.
Floating-Rate 7(a) Pools
- Interest rate trends and expectations continue to boost demand for floating-rate securities in general and SBA pools in particular.
- Low dollar priced SBA pools, many with par handles, compare very favorably on a yield basis with other investment-grade alternatives, especially considering the absence of rate caps and their full US faith and credit. Low dollar prices mitigate prepayment exposure.
- Overall speeds for SBA pools increased last month by modest amounts, with slightly faster speeds than the prior month for equipment loan pools and smaller declines for longer-amortization real-estate pools. While month-over-month variations exceeded those seen since October, prepayment speeds remained consistent in terms of both overall levels and seasoning related patterns and are significantly faster than those observed prior to the cash flow distribution methodology changes implemented by the SBA in October.
- Please see our February SBA prepayment commentary.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA products remains strong. Supply limited volume last week relative to the week prior, with two weeks passage since the last DCPC auction and two more before the next DCPC auction. The March auction will include both ten-year and twenty-year maturities.
- Demand for DCPCs remains strong as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
Government Guaranteed Loan Trading
- Loan trading activity waned a bit last week. Recently strong 7(a) loan volumes should lead to the creation of new floating-rate SBA pools in the near future, and their trading volume continued on pace last week. Less USDA loan supply resulted in a slowdown for this product despite ongoing demand.
February prepayments highlighted news for the SBA sector last week. Demand for lower dollar-priced floating-rate pools remains strong with a pickup in interest in higher priced pools occurring as the prepayment picture clarifies. Despite strong demand, fixed-rate SBA product flows might remain low this week as they are dependent on secondary offerings due to the timetable of auctions.
Director of Investment Product Strategies