March 25, 2019
The bond market rally and dovish Fed contributed to increased activity last week in fixed-rate SBICs and DCPC pools, which remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads. Portfolio managers are executing strategies to extend duration and call structures to protect against falling rates.
Fixed-Rate SBIC Debentures
- The SBIC debenture rate is set based off of a market-driven premium to 10-year Treasury Notes.
- The March semi-annual SBIC auction priced at a spread of 51bps over 10-year Treasury Notes.
- SBIC spreads tightened 4bps versus the September 2018 auction, but spreads are 8bps wider than the average spread over the last two years.
- Issuance totaled $987M increasing from the prior auction, but slightly below the six-year average.
Fixed-Rate DCPC Pools
- The March fixed-rate DCPC auction included 10, 20, and 25yr maturities.
- Issuance in the March auction improved compared to the prior month, which declined 43% MoM in February due to the government shutdown.
- Issuance totaled $286.8M in March and $195.2M in February, an increase of 47% MoM.
- Issuance for the 20yr term reversed its 6-month decline totaling $177.9M in March, while the 25yr term increased to $97.7M.
- Yield spreads versus Treasuries tightened in the March auction compared to the prior month for the 20yr and 25yr terms.
- Yield spreads are currently two to five basis points below the twelve-month average for the 20 and 25yr terms, while the 10yr term’s 47bps spread is the widest over the last year.
- The 55bp spread over Treasuries for the 20yr DCPC auction in March tightened 4bps from the prior month, while the 25yr term also tightened 1bps to 77bps.
Floating-Rate 7(a) Pools
- Pricing levels on SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities versus interest bearing cash and fed funds returns and also when compared to other floating rate bond alternatives.
- With 90-day Treasuries continuing to trade at a yield of 2.44% (unchanged vs. last week), many floating-rate bond options currently offer higher yields than longer duration fixed-rate bonds, driven by an inverted curve between 3-month and 10-year Treasuries, which last invertedin 2007.
- SBA prepayment speeds in March for Equipment and Real-Estate SBA 7(a) pools posted mixed results. CPRs for the Equipment pool population broadly increased, while Real-Estate speeds were virtually flat month-over-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 loans and SBA loans traded to financial institutions last week, but limited availability of supply has impacted activity recently. As has been the case for some time, supply and not demand limits loan trading volumes. The temporary disruption in new issuance has resulted in light secondary inventory levels for not only SBA investment pools, but guaranteed loans as well.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP