May 14, 2018
A generally slow period for the SBA still featured some notable highlights. A dual DCPC auction last week resulted in the widest yield spreads for the twenty-year term since last September and the widest ten-year spreads since July. And this morning SBA 7(a) prepayments speeds closed back in on recent average levels, reversing much of last month’s increase. Otherwise, ongoing trends held, with floater buyers showing preferences for short amortization pools and also for some of the stripped down pools trading at prices close to par.
Floating-Rate 7(a) Pools
- SBA prepayments decreased versus April, while remaining slightly above the average CPR for the last six months. Equipment-loan pools slowed by almost 0.8 CPR, while real-estate-backed pools slowed 1 CPR. This pushes speeds back in line with average levels for the last few months. CPRs for SBA 7(a) pools consistent enough and over a long enough period of time now allow for applicable vectors built on historical data to be used for comparing and analyzing pools. Please see our Prepayment Commentary for more information.
- Interest in near-par offerings included historical buyers of 7(a) pools and also floater buyers from other sectors. The yields compare very favorably to offerings in those other sectors, especially considering their lack of rate adjustment caps and US full faith and credit. The current cash flow offered by SBAs also sets them apart from many alternatives in a way quite desirable to many investors.
- Ten-year amortizing pools continue to receive greater investor focus than the longer real-estate pools. Pieces of various recently-issued pools, mostly in the 111 to 114 price range, seem to be the primary reentry point for some investors that were more or less sidelined by the October prepayment shift.
- The likelihood of short-term rate hikes later this quarter and also further into this cycle continues to spark interest in floaters in general and SBAs in particular, including some investors that typically hold minimal floating-rate products.
Fixed-Rate (DCPC and SBIC) Pools
- This month’s DCPC auction featured both ten- and twenty-year terms.
- The 37bp spread for the ten-year auction exceeded the yield difference versus Treasuries from every bi-monthly auction result since July 2017.
- The twenty-year auction also resulted in the widest yield spreads versus Treasuries in some time, tying September at 54bp.
- Away from the auctions, fixed-rate SBAs reflected a surprising moderation of what had been very strong investor interest. The relatively weak correlation between their prepayments and market rates result in superior convexity profiles compared to many other amortizing products at a time when many investors favor cash flow as opposed to lockout.
Government Guaranteed Loan Trading
- Limited supply of USDA and other government-guaranteed loans exists to meet the strong demand expressed by many investors for the product.
- The pace of 7(a) loan origination continues to favor greater pool issuance this business quarter.
Activity among fixed- and floating-rate SBAs moved higher by smaller amounts than the situation would have suggested last week. Today’s favorable prepayment report for SBA floaters and revisitation to favorable buying levels suggested by the ten-year Treasury’s current proximity to a 3% yield may provide the catalysts needed to push activity closer to where it seems to belong.
Director of Investment Product Strategies