March 12, 2018
Most of the ongoing trends in the SBA sector continued into last week. Fixed-rate SBA investment activity included a well-bid DCPC auction. Floating-rate activity maintained a focus on lower-priced pools, though activity in premiums continues to improve as understanding prepayment patterns subsequent to last fall’s implementation of principal distribution timing changes improves. Meanwhile, any available fixed-rate government guaranteed loans continue to be met by enthusiastic buyers.
Floating-Rate 7(a) Pools
- The likely yield benefits of a widely anticipated rate increase at the Fed’s meeting next week supported demand for floaters.
- 7(a) SBA pool prepays will be released this Wednesday morning.
- Ongoing demand for par-priced SBA floating-rate pool continued, though their importance in the overall flow of things diminished as higher-priced pools captured increasing market interest.
- Improvements in the investor understanding of the current prepayment methodologies encouraged buyers of pools with moderate premium exposure. New-issue equipment-backed pools seem to be the most prevalent. Most offering prices remained in the 113 or less range, with yields just below 1.90% at a 12 CPR.
Fixed-Rate (DCPC and SBIC) Pools
- Last Thursday the March DCPC auction priced. The 20-year term has a fixed coupon of 3.20%, 35 bps over Treasuries, the same spread as the previous month. The 10-year term has a fixed coupon of 3.00%, 37bps over Treasuries, a significantly higher spread than the previous auction; the last 10-year DCPC priced 22bps over Treasuries in January.
- Demand for DCPCs remains strong as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- The March SBIC is expected to price sometime next week.
Government Guaranteed Loan Trading
- USDA whole loans continue to be in high demand, with supply being the limiting factor to business volumes. Most government guaranteed USDA loans range from under 10-years to 20-year terms. WALs range from 4-5 years, with yields between 3.0% and 3.5%.
- The pace of DCPC loan origination is much slower than last year, likely limiting the issuance at the upcoming monthly auctions moving forward.
Demand for floating-rate pools with prices well above par increased amidst further clarification of prepayment patterns. Lower-priced pools, offered near par, remained in strong demand as the expected increase in short-term rates next week boosted their likely yields. The DCPC auction included both ten- and twenty-year maturities last week, and the pricing for both at the auctions demonstrated the strong current demand for fixed-rate SBA products.
Director of Investment Product Strategies