January 16, 2018
Last week brought limited activity in the SBA market, as many investors continue to attend to year-end administrative duties. The limited activity was centered on trading par handle floating-rate issues and the new issue DCPC. Loan trading activity has yet to return, although we do anticipate loan trading to return to recent levels once managers can return focus to their loan portfolios.
Floating-Rate 7(a) Pools
- Investors continue to focus on future rate increases and look to mitigate interest rate risk exposure by adding variable-rate investments 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 1.75%.
- The FOMC voted for the third time in 2017 to hike its overnight target rate range, this time to 1.25-1.50%. The hike was largely expected by the markets. Coupons on floating-rate SBAs increased by 25 bps on January 1, 2018.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be healthy, as the January DCPC auction was met with strong demand. The January DCPC auction included a 10-year and 20-year maturity. The 10-year term was a $12.6 million pool, with a 2.55% coupon. The 20-year term was just under $266 million, the second smallest pool over the past year. The pool is comprised of 357 loans, with a fixed coupon of 2.92%, 36 bps over Treasuries.
Government Guaranteed Loan Trading
- Loan activity continues to be tempered to start the year, although it is expected to return to recent activity levels once year-end administrative duties are completed. 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 3 months of the SBA’s fiscal year of 2018 7(a) loans are outpacing last year.
Demand for fixed-rate SBA securities continues to be healthy, as the January DCPC auction was met with strong demand. Portfolio managers continue to focus on future rate increases and look to mitigate interest rate risk exposure by adding variable-rate investments to their 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 soften over the next few weeks.
Greg Roll, CFA
Senior Vice President