March 5, 2018
Activity in low- to moderate-premium SBA floaters increased slightly last week, as portfolio managers digest recent prepayment data and continue to anticipate further tightening by The Fed. With supply being limited, activity has been tempered in fixed-rate investments lately, however depository managers will look to add DCPCs from the March auction later this week. Loan trading activity in 2018 continues to be robust, with depositories adding fixed-rate government-guaranteed USDA loans to their portfolios.
Floating-Rate 7(a) Pools
- With anticipation of another rate increase when the Fed meets the 3rd week of March, demand for floating-rate SBA pools continues to be healthy.
- Through the first two months of 2018 portfolio managers have been adding par-handle SBA floating-rate pools to their portfolios to satisfy their needs for floating-rate exposure. Most recently portfolio managers have gained a further understanding of the current prepayment methodologies and began to add pools with moderate premium exposure. New issue equipment-backed pools seem to be the most prevalent. Prices looked to be 113 or less, with yields just below 1.90% at a 12 CPR.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA products remains strong. Supply continues to be limited. Fortunately, the next DCPC auction is this Thursday. The auction will comprise both 10- and 20-year terms.
- The February auction only included a 20-year term that was just under $325 million, $59 million more than the January auction. The pool comprised 363 loans, with a fixed coupon of 3.22%, 30 bps greater than the previous month. The spread to Treasuries was comparable to the prior month at 35 bps.
- Demand for DCPCs remains strong as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
Government Guaranteed Loan Trading
- USDA whole loans continue to be in high demand, with limited supply being picked up quickly by depositories looking to grow their loan portfolios. The government-guaranteed USDA loans range from under 10-years to 20-year terms. WALs range from 4-5 years, with yields 3.0% 3.5%.
Demand for lower dollar-priced floating-rate pools remains strong with a pickup in interest in moderately priced pools occurring as the prepayment picture clarifies. Despite strong demand, fixed-rate SBA product flows remain constrained by limited supply. Portfolio managers look to the DCPC auction later this week to satisfy their needs for fixed-rate SBAs.
Greg Roll, CFA
Senior Vice President