March 9, 2020
Fixed-Rate SBIC Debentures
- The semi-annual SBIC auction is expected to price in the next several weeks. SBIC debentures are issued in March and September.
- The March SBIC auction is expected draw strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to neutralize asset sensitive interest rate risk profiles and to protect against falling rate exposures.
- SBIC debentures and fixed-rate SBA DCPC pools remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- The SBIC debenture rate is set based off of a market-driven premium to 10-year Treasury Notes.
- Current yield spreads on newer and seasoned SBICs have widened over the last several weeks and are pricing at approximately 74 bps or wider to Treasurys (I-curve).
- SBIC auction history is included below.
Fixed-Rate DCPC Pools
- The February fixed-rate SBA DCPC auction included 20-year and 25-year maturities.
- For the seventh-consecutive month issuance in the 25-year term exceeded the 20-year term. Issuance in the 25-year term totaled $192.8 in February, while the 20-year term totaled only $87.1M. Total issuance in the February auction of $279.9M declined $50.9M (-15.4%) compared to January issuance of $330.8M.
- Current yield spreads on newer and seasoned SBA DCPCs have widened over the last several weeks and are pricing at approximately 68 bps or wider to Treasurys (I-curve).
Floating-Rate 7(a) Pools
- SBA floating-rate pools with uncapped quarterly resets indexed to Prime experienced a decline in activity and lower levels of supply last week as markets are increasingly pricing in rate cuts.
- SBA floating-rate pools currently offer attractive yield opportunities compared to 3-month T-Bills and Fed Funds and offer similar or higher yields than longer duration fixed-rate bonds.
- SBA 7(a) prepayment speeds for March will be released later this week.
- It is critically important to evaluate pools at a wide variety of speeds and 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 FSA loans traded last week, but activity has been slow the last several weeks as supply remains a challenge, while demand for these loans remains high. As has been the case for some time, supply and not demand limits loan trading volumes.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP