July 8, 2019
The July fixed-rate DCPC auction Thursday is expected to draw 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.
Fixed-Rate DCPC Pools and SBIC Debentures
- The June fixed-rate DCPC auction included 25- and 20-year maturities.
- Issuance in the June auction was $9.3M more than in May.
- Issuance for the 25-year term totaled $146.5M in June, while the 20-year term was $166.6M.
- Yield spreads versus Treasurys widened 3 bps on the 25-year term and 5 bps on the 20-year term.
- Yield spreads are below the twelve-month average for the 20- and 25-year terms; but have widened out from lows seen in the last auction.
Floating-Rate 7(a) Pools
- SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities versus interest bearing cash, fed funds and 3-month T-Bills.
- SBA floating-rate pools traded to financial institutions last week, with the most active trading in par priced seasoned Real-Estate pools.
- 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.
- SBA prepayment speeds for SBA 7(a) pools posted minor declines in speeds compared to the prior month. Equipment and Real-Estate SBA 7(a) posted minor declines in speeds. CPRs for the Equipment pool population declined to 17.8 CPR from 18.7 CPR in May. Real-Estate speeds were basically flat, posting a speed of 18.4 CPR compared to 18.6 CPR in the prior month.
- 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.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural FSA loans traded to financial institutions last week and improved availability of supply has contributed to trading 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