February 26, 2018
As investors anticipate a continued increase in short-term rates, demand for floating-rate investments continues to be strong. Activity in the sector centered around low to moderately priced SBA floaters last week. Monthly prepayment speeds revealed consistency with every month since the October.
procedural change implemented by the SBA. Most recently activity in fixed-rate investments has been tempered due to limited supply, however depository managers continue to add DCPC and USDA whole loans at a measured pace. Loan trading activity in 2018 has been healthy, although activity has slowed over the past two weeks.
Floating-Rate 7(a) Pools
- With anticipation of another rate increase when the Fed meets the 3rd week of March, demand for floating-rate SBA pools continues to be healthy.
- 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. In addition, moderately priced SBA pools have been offering incremental yield pick-up over par priced pools.
- 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 continues to be limited as the next DCPC auction is not until March 8th, however paper from the most recent auctions continue to trade in the secondary.
- 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 has slowed recently, however strong 7(a) loan volumes should lead to the creation of new floating-rate SBA pools in the near future. USDA whole loans continue to be in high demand, however recent supply limitations have slowed the overall trade activity.
February prepayments highlighted news for the SBA sector earlier this month. Demand for lower dollar-priced floating-rate pools remains strong with a pickup in interest in moderately 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.
Greg Roll, CFA
Senior Vice President