September 9, 2019
The September fixed-rate DCPC auction last week drew strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to protect against falling rates. The semi-annual SBIC auction is expected to price later this week, with bonds available from the auction next week.
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 September fixed-rate DCPC auction included 10-year, 20-year, and 25-year maturities. Issuance increased and spreads widened in September for all maturity terms compared to the prior month.
- For the second consecutive month issuance in the 25-year term exceeded the 20-year term. Issuance for the 25-year term totaled $203.4M in September, while the 20-year term totaled $166.2M. Issuance in the September auction increased $74.8M (+24.1%) compared to August.
- Yield spreads are currently tighter than the twelve-month average for the longer terms and are trading at tight spreads levels compared to the previous twelve months. Spreads widened 1 bp in the September auction for the 20-year and 25-year maturities.
Fixed-Rate SBIC Debentures
- The semi-annual SBIC auction is expected to price later this week, with bonds available from the auction next week.
- 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 an inverted yield curve between 3-month and 10-year Treasurys.
- SBA prepayment speeds for SBA 7(a) pools will be released next week.
- Speeds for SBA 7(a) Equipment and Real-Estate pools posted mixed CPRs for August. CPRs for the Equipment pool population declined to 17.0 CPR from 17.7 CPR, largely driven by a slow-down in seasoned vintages (2012-2015). Real-Estate speeds increased to 20.1 CPR from 18.1 CPR driven by broad-based increases.
- 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.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural FSA loan trading was light last week as limited availability of supply has impacted activity recently, 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