July 22, 2019
Floating-Rate 7(a) Pools
- SBA floating-rate pools traded to financial institutions last week, with the most active trading in par priced seasoned Real-Estate pools.
- SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities compared to 3-month T-Bills.
- Many floating-rate bond options currently offer similar and even higher yields than longer duration fixed-rate bonds, driven by an inverted yield curve between 3-month and 10-year Treasurys.
July SBA Prepayment Speeds
- SBA prepayment speeds for SBA 7(a) Equipment and Real-Estate pools posted minor declines for the second month in a row.
- CPRs for the Equipment pool population declined to 17.7 CPR from 17.8 CPR in June. Real-Estate speeds declined to 18.1 CPR from 18.4 CPR in June.
- It is critically important to evaluate pools at a wide variety of speeds and also 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.
Fixed-Rate DCPC Pools
The July fixed-rate DCPC auction drew strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to protect against falling rates. Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives.
- The July fixed-rate DCPC auction included 10, 20, and 25-year maturities.
- Issuance increased and spreads tightened in July for all maturity terms compared to the prior month.
- Issuance in the July auction increased $20.4M (+6.5%) compared to June.
- Issuance for the 25-year term totaled $151.3M in July, while the 20-year term totaled $171.0M.
- Yield spreads are currently tighter than the twelve-month average for all maturities and are trading at the tightest spread levels over the last year.
- Yield spreads versus Treasurys tightened 6 bps on the 25-year term, 5 bps on the 20-year term, and 4bps on the 10-year term.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural FSA loan trading slowed last week as limited availability of supply has impacted activity recently. 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