May 13, 2019
Issuance declined and spreads tightened in the May fixed-rate DCPC auction last Thursday compared to the April auction. SBA 7(a) prepayment speeds for May will be available later this week.
Fixed-Rate DCPC Pools
Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives. Portfolio managers are considering strategies to extend duration and call structures to protect against falling rates.
- The May fixed-rate DCPC auction included 10, 20, and 25yr maturities.
- Issuance in the May auction declined compared to the prior month.
- Issuance totaled $314.7M in May and $369.3M in April, a decline of 14.8% MoM.
- Issuance for the 20yr term totaled $196.9M in May, while the 25yr term fell to $106.9M.
- Yield spreads versus Treasuries tightened 4 to 8bps in the May auction compared to the prior month for the 20yr and 25yr terms.
- Yield spreads are below the twelve-month average for the 20 and 25yr terms; the tightest spreads over the last twelve-months.
Floating-Rate 7(a) Pools
- SBA floating-rate pools traded to financial institutions last week, but limited availability of supply has resulted in light secondary inventory levels, which has impacted activity recently.
- 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.
- With 90-day Treasuries trading at a yield of 2.40% many floating-rate bond options currently offer similar and even higher yields than longer duration fixed-rate bonds, driven by a flat yield curve between 3-month and 10-year Treasuries.
- SBA prepayment speeds for SBA 7(a) pools will be available later this week.
- 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 FSA loans traded to financial institutions last week and improved availability of supply has contributed to trading activity recently. 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