May 29, 2018
SBA activity languished along with the balance of the bond market last week. While fixed-rate products volumes may have suffered a bit from the lower available yields as debt markets rallied, floaters should seemingly have at least held pace, as much of the market expects a short-term rate increase in June. Loan activity did pick up last week, as volume there follows availability more than demand or overall market activity levels.
Floating-Rate 7(a) Pools
- Par handle pools continue to represent the focal point for the sector. Further inquiries from historical buyers of other floaters continued last week even as overall activity and inquiries waned. The attention is probably a function of competitive yields versus other floaters, no rate adjustment caps, a government guarantee, and amortizing cash flows.
- Activity in equipment-loan pools fell off after picking up for the two prior weeks. The cash flows from shorter-amortization schedules and more consistent recent prepayment speeds should attract attention again when market activity reignites, especially as comfort with prepayments returns. Many equipment-loan pools offer favorable yields and margins using recent market prices and realistically vectored prepayment speeds.
- Another short-term rate hike later this quarter seems likely. Despite this many investors continue to use current short-term rates when comparing floaters to fixed-rate alternatives.
Fixed-Rate (DCPC and SBIC) Pools
- DCPC and SBIC yields and yield spreads versus Treasuries remain at the wide end of their ranges for the last several months.
- Shorter, more seasoned fixed-rate SBAs continue to trade at tighter spreads than recently-issued bonds. This continues to stimulate a small volume of bid inquiries for extension trades.
- At current spreads, SBIC yields exceed yields for most any other US government-guaranteed product having a ten-year stated final.
Government Guaranteed Loan Trading
- A spate of available government-guaranteed agricultural loans traded to financial institutions. As has been the case for some time, supply and not demand limits loan trading volumes.
- Strong 7(a) loan origination continues to outpace pool issuance.
With such a quiet bond market last week, a pullback in SBA volume was almost assured. Floaters inquiries should increase as a likely June rate hike by the Fed approaches. If so, par handle pools and equipment loan pools should return as the darlings of the sector. Fixed-rate SBA volumes might not resurge until next week, as the monthly DCPC auction occurs on that Thursday.
Director of Investment Product Strategies