November 26, 2018
Floating-rate SBA pools remain attractive to investors as yields on these pools should move higher if the Fed raises rates as expected later this year. Prepayment speeds for SBA pools increased in November compared to the previous month.
Floating-Rate 7(a) Pools
- Investors have remained active in floating rate equipment pools offered at par and also those with premium pricing. Ten-year WAM equipment-loan pools should attract investor interest due to the cash flows from shorter-amortization schedules: many competing floating rate alternatives offer minimal or no principal cash flows for a significant interval after issuance.
- 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 and also when compared to other floating rate bond alternatives.
- Yields ranging from approximately 2.70% on par pools and 3.00% on premium pools are currently available. With 90-day Treasuries trading at 2.40%, this represents an opportunity to buy current pay bonds with a par handle price at a spread of 30bp based on the 90-day reset.
- The market is currently pricing in around a 75% chance of another 25bps hike by the Fed at their meeting in December and 12 of 16 Fed members are projecting another hike this year, which should continue to drive demand in floating-rate SBAs.
- With another 25bps hike in fed funds, par priced floating rate SBA equipment pools would yield approximately 2.92% using the current prepayment vector, combined with the floating rate benefits of lower price volatility and effective duration.
- Prepayment speeds for Equipment SBA 7(a) pools posted faster speeds this month than for October and September while Real-Estate pools posted overall faster than October but fell back in line with September speeds. In either case, both printed higher speeds than their respective 6 and 12-month moving averages.
Fixed-Rate DCPC Pools
- Fixed-rate DCPC pools and SBIC fixed-rate debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- The November DCPC auction included 10yr, 20yr and 25yr terms.
- Yield spreads versus Treasuries widened in the November auction compared to the prior month and are wider than the average for the prior 12 months in all maturity terms.
- The 65bp spread over Treasuries for the 20yr DCPC auction in November widened 6bps from the prior month, while the 25yr term widened 7bps to 78bps.
- Pool issuance in the November auction was down compared to the previous auction. Issuance for the 20yr term declined to $248.5M, while the 25yr term declined to $67.6M.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural loans and SBA loans actively traded to financial institutions last week. As has been the case for some time, supply and not demand limits loan trading volumes.
Dan Stimpson, CPA
Senior Vice President