January 7, 2019
The January fixed-rate DCPC auction is scheduled for later this week and includes 10, 20, and 25yr maturities. Investors were active last week in floating-rate SBA pools as yields on these pools have moved higher with Fed rate hikes. Spreads on discount to par priced SBA floater pools have widened over the last month from the mid 30’s to the mid 50’s over 90-day Treasuries.
Floating-Rate 7(a) Pools
- Investors have remained active in floating rate equipment pools offered at par and also those with premium pricing.
- 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.
- Yields ranging from approximately 2.96% on discount priced pools and 3.23% on premium priced pools are currently available. With 90-day Treasuries trading at a yield of 2.41%, 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.
Fixed-Rate DCPC Pools
- The January DCPC auction is scheduled for later this week and includes 10, 20, and 25yr maturities.
- The December DCPC auction included 20yr and 25yr maturities.
- Fixed-rate DCPC pools and SBIC fixed-rate debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- Yield spreads versus Treasuries widened in the December auction compared to the prior month and are wider than the average for the prior 12 months in all maturity terms.
- The 70bp spread over Treasuries for the 20yr DCPC auction in December widened 5bps from the prior month, while the 25yr term also widened 5bps to 83bps.
- Pool issuance in the December auction increased overall compared to the previous auction. Issuance for the 20yr term declined to $244.2M, while the 25yr term increased to $80.8M.
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