November 25, 2019
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, while offering comparable yields and spreads.
- The November fixed-rate SBA DCPC auction drew strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to neutralize asset sensitive interest rate risk profiles.
- For the fourth consecutive month issuance in the 25-year term exceeded the 20-year term. Issuance for the 25-year term totaled $193.4M in November, while the 20-year term totaled $170.9M. Total issuance in the November auction of $373.7M was equal to issuance in October of $373.1M.
- A yield spread of 58 bps for the 25-year term was unchanged month over month. The 20-year term widened 2 bps in the November auction to 46 bps. Yield spreads remain tighter than the twelve-month average for the 20 and 25-year terms, while the 10-year term widened 10 bps to its widest spread in over a year (53 bps).
- Current yield spreads on newer and seasoned SBA DCPCs and SBICs are pricing at approximately 57 bps or wider to Treasurys (I-curve).
Floating-Rate 7(a) Pools
- With the Fed likely on hold for the foreseeable future after another 25 bp rate cut, floating rate bonds may see a pickup in activity as part of barbell portfolio strategies.
- SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities compared to 3-month T-Bills.
- SBA prepayment speeds for SBA 7(a) Equipment and Real-Estate SBA 7(a) pools had mixed CPRs for the month of November. Equipment loan pools declined slightly from October’s 16.6 to 16.1 CPR. Results on specific vintages were mixed, with the older and smaller pools generally increasing. Real-Estate loan pools increased from October’s 18.7 to 21.1 CPR.
- 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 loan activity was slow last week 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