May 7, 2018
Activity in the SBA sector increased slightly last week from the prior, very slow week. Fixed-rate SBA volumes remained slow, with minimal yield curve movement and no monthly auctions to stir much investor interest. Activity improved slightly for 7(a) pools, as most investors’ outlooks for short-term rates favor floating-rate products.
Floating-Rate 7(a) Pools
- Near-par offerings continue to comprise a significant portion of the floater activity. While some historical buyers of 7(a) pools continue to buy the lower-coupon offerings, these floaters have pulled in investors from other bond market sectors where many lesser quality floaters and inferior structures prevail. SBA floaters offered near par offer current cash flow with full faith and credit, with coupons unencumbered by restrictive cap structures.
- Ten-year amortizing pools received greater investor focus than the longer real-estate pools last week. 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.
- Even though the market widely expects a short-term rate hike by the Fed sometime this quarter, many investors continue to conservatively use the current Prime rate in yield comparisons versus fixed-rate products and money markets. If consideration is given to the likelihood of further short-term rate increases, floaters in general and SBAs in particular offer superior income possibilities versus most short-duration alternatives.
- Though prepayments elevated in April, CPRs overall remained consistent with observations since the October shift. Six-month moving averages produce the below vectors. To obtain consistently sized and seasoned cohorts, the portrayed vectors use twelve month buckets counting backward from the most recent month as opposed to the calendar-year-based buckets in the tables presented in our monthly SBA prepayment commentary.
Fixed-Rate (DCPC and SBIC) Pools
- The DCPC auction this Thursday includes both ten- and twenty-year terms.
- Fixed rate SBA products, both SBICs and DCPCs, recently attracted considerable attention from traditional buyers of stable CMO structures and also of agency multifamily products. The relatively weak correlation between their prepayments and market rates results in comparable convexity profiles. Also, flattening yield curves generally favor current cash flow over lockout.
Government Guaranteed Loan Trading
- The supply of USDA and other government-guaranteed loans all but dried up recently, while demand remains strong.
- The pace of 7(a) loan origination continues to favor greater pool issuance this business quarter.
Tepid weekly volume for the SBA sector last week resulted from a lack of fixed-rate issuance and only a modest pickup in pace by floater buyers. SBA floaters should enjoy the enhanced attention resulting from the upward path of short-term rates, with many investors anticipating another rate hike later this quarter. Fixed-rate volume should pick up this week with the monthly DCPC auction and stronger expectations of further rate hikes.
Director of Investment Product Strategies