October 9, 2018
SBA activity is expected to be focused on the DCPC auction later this week, which includes 20yr and 25yr terms. Investors have also remained active in floating rate equipment pools offered at par and premium pricing as yields on SBA floating rate pools moved higher over the last month and are likely to move higher if the Fed raises rates later this year. The market is currently pricing in over 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.
Floating-Rate 7(a) Pools
- Investors have remained active in floating rate equipment pools offered at par and also those with premium pricing. Activity in premium pools picked up after the Fed meeting and exceeded the activity in par priced pools.
- 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 2.20%, this represents an opportunity to buy current pay bonds with a par handle price at a spread of 50bp based on the 90-day reset.
- With another 25bps hike in fed funds, floating rate SBA equipment pools would yield approximately 3.20% using the current prepayment vector, a comparable yield to a 10-year Treasury bond (3.23% yield) combined with the floating rate benefits of lower price volatility and effective duration.
Fixed-Rate DCPC Pools
- The October DCPC auction this week is expected to include 20yr and 25yr terms.
- The September DCPC auction included 10yr, 20yr and 25yr terms.
- Yield spreads versus Treasuries remain at the wide end of their ranges for the last several auctions.
- The 64bp spread over Treasuries for the twenty-year DCPC auction in September was unchanged from the prior month, while the twenty five-year term tightened a basis point to 76bps.
- The ten-year DCPC auction priced at a spread of 38bps, 6bps tighter than the July auction.
- Pool issuance in the September auction for the 10yr and 25yr terms increased over the previous auction, while 20yr pool issuance declined $65.4M to $278.9M.
Fixed-Rate SBIC Debentures
- The SBIC debenture rate is set based off of a market-driven premium to 10-year Treasury Notes.
- The semi-annual SBIC auction priced last Thursday at a spread of 55bps over 10-year Treasury Notes.
- SBIC spreads widened versus the March auction and the 48bp average spread.
- Issuance totaled $923M; down slightly from the prior auction and the 6-year average.
- Demand for SBICs remains strong as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
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