June 11, 2018
The twenty-year DCPC auction last Thursday priced at the widest spreads since February 2016. Activity in floaters is expected to pick up this week as much of the market expects a short-term rate increase from the Fed on Wednesday. Investors were also active in government-guaranteed USDA agricultural loans last week.
Floating-Rate 7(a) Pools
- Par handle pools continue to represent the focal point for the sector.
- Ten-year WAM equipment-loan pools should also attract investor interest due to the cash flows from shorter-amortization schedules and more consistent recent prepayment speeds. Many equipment-loan pools offer favorable yields and margins using recent market prices and realistically vectored prepayment speeds.
- Another short-term rate hike seeks likely this Wednesday, which should also continue to drive demand in floating-rate alternatives.
Fixed-Rate (DCPC and SBIC) Pools
- The DCPC auction last Thursday only included a twenty-year term.
- The 63bp spread for the twenty-year auction exceeded the yield difference versus Treasuries from every monthly auction result since February 2016.
- DCPC and SBIC yields and yield spreads versus Treasuries remain at the wide end of their ranges for the last several months.
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.
A likely short-term rate increase by the Fed this Wednesday and the DCPC auction last week pricing at wide spreads should result in activity in both floating and fixed-rate SBAs this week.
Dan Stimpson, CPA
Senior Vice President