February 3, 2020
Floating-Rate 7(a) Pools
- SBA floating-rate pools with uncapped quarterly resets indexed to Prime experienced a continued pickup in activity the last two weeks with the majority of the activity in higher coupon 10-year equipment pools priced at moderate premiums.
- SBA floating-rate pools currently offer attractive yield opportunities compared to 3-month T-Bills and Fed Funds and offer similar or higher yields than longer-duration fixed-rate bonds, driven by the bond rally, spread tightening in other product sectors and flattening of the yield curve over the last several weeks.
- SBA prepayment speeds increased for both Equipment and Real-Estate SBA 7(a) pools for January. Equipment loan pool speeds increased from 16.2 to 18.0 CPR and results were mixed across individual vintages. Real-Estate loan pools increased from 18.0 to 23.5 CPR and most individual vintages were above their 6- and 12-month average.
- 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.
Fixed-Rate DCPC Pools
- The February fixed-rate SBA DCPC auction this Thursday, which includes 20-year and 25-year maturities, is expected to draw strong investor interest as many 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.
- 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.
- The January fixed-rate SBA DCPC auction included 10-year, 20-year, and 25-year maturities.
- For the sixth consecutive month, issuance in the 25-year term exceeded the 20-year term. Issuance for the 25-year term totaled $207.2M in January (largest monthly issuance ever for the 25-year term), while the 20-year term totaled only $113.4M. Total issuance in the January auction of $330.8M declined $12M (-3.5%) compared to December issuance of $342.8M.
- Yield spreads remain tighter than the twelve-month average for the 20 and 25-year terms. Spreads tightened 1 to 2 bps month over month for the longer terms (56 bps yield spread for the 25-year term and 43 bps for the 20-year term).
- Current yield spreads on newer and seasoned SBA DCPCs and SBICs are pricing at approximately 56 bps or wider to Treasurys (I-curve).
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural FSA loan activity has been slow the last several weeks 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