June 4, 2018
SBA activity is expected to pick up this week with focus on the DCPC auction Thursday. While fixed-rate products volumes may have suffered a bit from the lower available yields as debt markets rallied, floaters should seemingly have at least held pace, as much of the market expects a short-term rate increase next week. Loan activity remained elevated last week, as volume there follows availability more than demand or overall market activity levels.
Floating-Rate 7(a) Pools
- Par handle pools continue to represent the focal point for the sector. Further inquiries from historical buyers of other floaters continued last week even as overall activity and inquiries were muted. The attention is probably a function of competitive yields versus other floaters, no rate adjustment caps, a government guarantee, and amortizing cash flows.
- Activity in equipment-loan pools remained light last week compared to recent levels of activity, impacted by the holiday-shortened week, strong rally, and month end close distractions. The cash flows from shorter-amortization schedules and more consistent recent prepayment speeds should attract attention again when market activity reignites, especially as comfort with prepayments returns. 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 next week, which should also continue to drive demand in floating-rate alternatives.
Fixed-Rate (DCPC and SBIC) Pools
- The DCPC auction this Thursday includes both ten- and twenty-year terms.
- DCPC and SBIC yields and yield spreads versus Treasuries remain at the wide end of their ranges for the last several months.
- At current spreads, SBIC yields exceed yields for most any other US government-guaranteed product having a ten-year stated final.
- Fixed rate SBA products, both SBICs and DCPCs, recently attracted 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 37bp spread for the ten-year auction exceeded the yield difference versus Treasuries from every bi-monthly auction result since July 2017.
- The twenty-year auction also resulted in the widest yield spreads versus Treasuries in some time, tying September at 54bp.
Government Guaranteed Loan Trading
- A spate of available 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.
With anticipation building for a likely short-term rate increase next week and the DCPC auction Thursday, both floating and fixed-rate SBA volumes are expected improve this week.
Dan Stimpson, CPA
Senior Vice President