July 2, 2018
SBA activity during the holiday shortened week is expected to be focused on the DCPC auction Thursday, which includes 10yr and 20yr terms and may also include a 25yr term. The Federal Reserve raised the Fed Funds Target Rate 25bps recently and two additional rate hikes are projected by the Fed this year, which should continue to drive demand in floating-rate SBAs.
Floating-Rate 7(a) Pools
- Par handle pools continue to represent the focal point for the sector.
- Premium priced pools have seen increased investor activity the last several weeks after the Fed rate hike in June to the highest levels of activity since October of last year.
- Ten-year WAM equipment-loan pools should also attract investor interest due to the cash flows from shorter-amortization schedules. Many equipment-loan pools offer favorable yields and margins using recent market prices and realistically vectored prepayment speeds.
Fixed-Rate (DCPC and SBIC) Pools
- The DCPC auction this Thursday includes both 10yr and 20yr terms and may also include a 25yr term.
- DCPC and SBIC yields and yield spreads versus Treasuries remain at the wide end of their ranges for the last several months.
- Fixed rate SBA products, both SBICs and DCPCs, continue to attract considerable attention from traditional buyers of stable CMO structures and also of agency multifamily products. The relatively weak correlation between their prepayments and market rates results in comparable convexity profiles. Also, flattening yield curves generally favor current cash flow over lockout.
- The 63bp spread for the twenty-year DCPC auction in June exceeded the yield difference versus Treasuries from every monthly auction result since February 2016.
Government Guaranteed Loan Trading
- Government-guaranteed USDA agricultural loans traded to financial institutions. As has been the case for some time, supply and not demand limits loan trading volumes.
Dan Stimpson, CPA
Senior Vice President