March 19, 2018
Last week’s calendar featured prominent events for both fixed- and-variable rate SBA markets. March prepayments speeds slowed in an unsurprising way considering seasonal factors and day count, while the semi-annual SBIC auction offered a major boost at a time when flows in the fixed-rate SBA sector had been suppressed by a lack of supply. Overall, prices and trends for both fixed- and floating-rate products remained in line with recent trends.
Floating-Rate 7(a) Pools
- The March pool factor report was released last Wednesday. An almost 2CPR decline for equipment loan pools and almost 2.5CPR decline for longer-amortization real-estate pools reflected more in the way of calendar influences from day count, seasonality, and statistical noise more than a change in trends and patterns. In the case of equipment pools, the decline in part represented a reversal of last month’s 1.1CPR increase. And a second monthly decline does not reveal any sort of trend for real estate pools as the prior month speeds only lowed by a 0.1 CPR. Allowing for the technical factors, prepayment speeds remained consistent with the previous five months including the seasoning ramp.
- The potential yield benefits of widely-anticipated further short-term rate increases based on Fedspeak and the economic outlook continued to support demand for floaters. With Wednesday’s FOMC meeting, investors are anticipating a further increase in short-term interest rates.
- Ongoing demand for par-priced SBA floating-rate pools continued, though their importance in the overall flow of things diminished as higher-priced pools captured increasing market interest.
- New issue equipment-backed pools offered in the 112 to 114 price range and expected yields in the 1.9% range attracted interest from buyers growing more comfortable with post-October prepayment patterns. Most offering prices are in the 113 or less range, with yields just below 1.90% at a 12 CPR.
Fixed-Rate (DCPC and SBIC) Pools
- Last Wednesday the SBIC auction priced. The $1.086 billion offered exceeded the SBIC auction average size for the last five years by $70 million. If measured versus the ten-year Treasury, the auction priced 6bp cheaper than the prior auction last September.
- Demand for SBICs and DCPCs remains strong as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
Government Guaranteed Loan Trading
- Supply continues to limit trading volumes for government-guaranteed loans. Recent offerings of government-guaranteed USDA loans ranged from under 10-years to 20-year terms, with average lives ranging 4-5 years, priced to yield 3.0% – 3.5%.
- The pace of DCPC loan origination remains slow relative to last year, likely limiting the issuances at the upcoming monthly auctions.
Demand for floating-rate pools with prices well above par increased, as prepayment patterns clarified and overall speeds slowed somewhat. Meanwhile, lower-priced pools, offered near par, also underwent strong demand as the expected increase in short-term rates this week boosted their likely yields. The SBIC auction also helped to fill the recent dearth of supply for investors seeking fixed-rate SBAs.
Director of Investment Product Strategies