January 6, 2020
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 this Thursday, which includes 10-year, 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.
- The December fixed-rate SBA DCPC auction included 20-year and 25-year maturities.
- For the fifth consecutive month issuance in the 25-year term exceeded the 20-year term. Issuance for the 25-year term totaled $196.1M in December, while the 20-year term totaled $146.6M. Total issuance in the December auction of $342.8M declined $30.9M (-8.3%) compared to November issuance of $373.7M.
- Yield spreads remain tighter than the twelve-month average and both maturity terms tightened 1 bp month over month (57 bps yield spread for the 25-year term and 45 bps for the 20-year term).
- Current yield spreads on newer and seasoned SBA DCPCs and SBICs are pricing at approximately 57 bps or wider to Treasurys (I-curve).
Floating-Rate 7(a) Pools
- With the Fed likely on hold for the foreseeable future, 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.
- SBA prepayment speeds were mixed for Equipment and Real-Estate SBA 7(a) pools in December. Equipment loan pools were essentially unchanged, going from 16.1 to 16.2 CPR. When observed on a vintage-by-vintage basis, the more notable speed variations occurred in older pools. Real-Estate loan pools decreased from November’s 21.1 to 18.0 CPR. Most individual vintages saw their speeds decline, but with varying steepness.
- 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.
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