November 4, 2019
Floating-Rate 7(a) Pools
- With the Fed likely on hold for the foreseeable future after another 25 bp rate cut last week, 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.
- Many floating-rate bond options currently offer similar yields compared to longer duration fixed-rate bonds, driven by a flat yield curve between 3-month and 5-year Treasurys.
- SBA prepayment speeds for SBA 7(a) Equipment and Real-Estate pools both posted slower speeds for the month of October. Equipment loan pools declined from September’s 18.1 CPR to 16.6 CPR. This was driven by broad-based declines in 2017 and 2018 vintages. Real-Estate loan pools declined from 19.4 CPR in September to 18.7 CPR; which, unlike equipment pools, was driven by declines in almost every vintage except 2017 and 2018.
- It is critically important to evaluate pools at a wide variety of speeds and also 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.
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 this Thursday, which includes 10-year, 20-year, and 25-year maturities, is expected to draw strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to neutralize asset sensitive interest rate risk profiles.
- The October fixed-rate DCPC auction, which included 20-year and 25-year maturities, attracted strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to protect against falling rates.
- For the third consecutive month issuance in the 25-year term exceeded the 20-year term. Issuance for the 25-year term totaled $197.5M in October, while the 20-year term totaled $175.6M. Total issuance in the October auction declined $12.3M (-3.2%) compared to September.
- Spreads widened 2 bps in the October auction for the 25-year term and widened 4 bps for the 20-year term; however, yield spreads remain tighter than the twelve-month average.
- Current yield spreads on newer and seasoned SBA DCPC’s are pricing at approximately 61 bps or wider to Treasuries (I-curve).
Fixed-Rate SBIC Debentures
- The trust certificate rate fixed coupon was 2.28% and pool issuance totaled $991.6 million in the semi-annual SBIC auction held in September.
- The SBIC new issue (SBIC 2019-10B 1) is currently priced to yield 2.157% at 10 CPR, an approximate 51 bps yield spread to Treasuries (I-curve) and a 6.2-year average life. Seasoned SBIC’s offer wider spreads and shorter average lives at 12 CPR.
Government Guaranteed Loan Trading
- Government-guaranteed USDA agricultural FSA loans traded last week, but activity has been slow the last several weeks 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