January 22, 2019
Investor activity was focused on seasoned and new issue fixed-rate SBA pools last week. Fixed-rate DCPC pools remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads. Investor interest continued in floating-rate SBA pools as yields on these pools have moved higher with Fed rate hikes and spreads have widened. Prepayment speeds for SBA 7(a) pools increased in January compared to the previous month.
Floating-Rate 7(a) Pools
- Pricing levels on SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities versus interest bearing cash and fed funds returns and also when compared to other floating rate bond alternatives.
- Spreads on discount to par priced SBA floater pools have widened from the mid 30’s to the mid 50’s over 90-day Treasuries.
- With 90-day Treasuries trading at a yield of 2.40%, this represents an opportunity to buy discount priced SBA floater pools at a spread of 55bp over 90-day Treasuries.
- Ten-year WAM equipment-loan pools should attract investor interest due to the cash flows from shorter-amortization schedules: many competing floating rate alternatives offer minimal or no principal cash flows for a significant interval after issuance.
- Prepayment speeds for SBA pools 7(a) increased in January compared to the previous month. Equipment and Real-Estate SBA 7(a) pools both gave back some of the December declines and posted increases month-over-month. Equipment pools overall posted a manageable increase of only 2%, while Real-Estate pools posted a 16% increase.
Fixed-Rate DCPC Pools
- The January DCPC auction included 10, 20, and 25yr maturities.
- Yield spreads versus Treasuries widened in the January auction compared to the prior month for the 10yr and 25yr terms. All maturity terms are wider than the average for the prior 12 months.
- The 66bp spread over Treasuries for the 20yr DCPC auction in January tightened 4bps from the prior month, while the 25yr term widened 2bps to 85bps.
- Yield spreads over Treasuries in the 20yr term are 10bps wider and the 25yr term is 6bps wider than its 12-month average spread.
- Pool issuance in the January auction increased overall compared to the previous auction. Issuance for the 20yr term continued its 5-month decline totaling $231.8M, while the 25yr term increased to $110.8M.
- The issuance of the 25yr term, first offered in July 2018, has resulted in lower issuance in the 20yr term, which declined $12.4M compared to the prior month. 20yr issuance is $34M lower than January 2018 and is $57.1M below its 12-month average, while the 25yr term’s average issuance has increased to $64.9M.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural loans and SBA loans actively traded to financial institutions last week. 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