January 21, 2020
SBA Prepayment Speeds
- 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.
Floating-Rate 7(a) Pools
- With the Fed likely on hold for the foreseeable future and the curve steepening, 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 and Fed Funds.
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.
- The January fixed-rate SBA DCPC auction held last Thursday included 10-year, 20-year, and 25-year maturities.
- The auction drew 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.
- 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 loans traded last week, but 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