October 15, 2019
The October fixed-rate SBA DCPC auction last week attracted strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to protect against falling rates. 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.
Fixed-Rate DCPC Pools
- The October fixed-rate DCPC auction included 20-year and 25-year maturities. Total issuance declined and spreads widened in the October auction compared to the prior month.
- 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 Treasurys (I-curve).
Fixed-Rate SBIC Debentures
- The semi-annual SBIC auction was held last month. The trust certificate rate fixed coupon was 2.28% and pool issuance totaled $991.6 million.
- The SBIC new issue (SBIC 2019-10B 1) is currently priced to yield 2.123% at 10 CPR, an approximate 53 bps yield spread to Treasurys (I-curve) and a 6.2-year average life.
- The SBIC debenture rate is set based off of a market-driven premium to 10-year Treasury Notes. SBIC auction history is included below.
Floating-Rate 7(a) Pools
- 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 and even higher yields than longer duration fixed-rate bonds, driven by a flat to inverted yield curve between 3-month and 10-year Treasurys. These curve points have been inverted since May, but have recently steepened and are currently 6 bps positively sloped.
- SBA prepayment speeds for SBA 7(a) Equipment and Real-Estate pools will be released later this week.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural FSA loans actively traded last week as supply has remained steady over the last month, 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