Monday, May 7, 2018

The SBA and frangible

Readily broken; breakable.
from Latin frangere (to break) which also gave us fraction, refract, chamfer, defray, infringe, and fracture.


SBA 7(a) loan demand continues to be infrangible.   For the six month period ending 3/30/2018, SBA 7(a) loans are up 6% over the same period last year.

The pick-up in SBA 7(a) loan approvals is good news for the economy.  Just for fun I calculated the correlation coefficient between SBA 7(a) loan volume and GDP for over six years using the Microsoft CORREL function.  It came out to a statistically significant 0.86.

Interestingly there has been a significant increase in SBA 7(a) loans to new businesses.  59% of all loan requests were to new businesses so far this year.  For the last two years it had averaged closer to 36% of all approvals.  It could be that SBA considers a business acquisition to be a new business.  SBA 7(a) loans for business acquisitions have increased as a result of the new guidance allowing down payments as low as 10%.

SBA 504 loan demand on the other hand appears to be frangible.  504 loans so far this year are down 30% by dollar amount and 23% down by loan number.





SBA 504 Loan Debenture Rate for April
The debenture rate is only 3.31% but note rate is 3.36454% and the effective yield is 5.029%.


The slope of the yield curve is not as frangible as you’d think.  The Federal Reserve recrudescence on monetary policy is causing some splenetic presentiment as to whether it is enervating inflation.

At their last meeting on monetary policy, Federal Reserve officials left interest rates unchanged, but changed their policy statement by adding a reference to the “symmetric” nature of their inflation target TWICE.

The first time they said “Inflation on a 12-month basis is expected to run near the committee’s symmetric 2 percent objective over the medium term”.  The other time they said “The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.”

What does symmetric even mean?  It comes from the Latin symmetria which came from the Greek symmetria meaning commensurateness.  Symmetry implies either a quantitative equality of parts ( the perfect symmetry of pairs of matched columns).  In geometry, two points(1, 1) and(−1, −1) are symmetrical with respect to(0, 0).  A set is symmetric when pairs of points have this relation with respect to the same center.

I think what they are trying to say is that some of the inflation rhetoric that has indicated a deviation of inflation to the upside will not necessarily elicit a policy response, especially in light of the prolonged period of below-target inflation.

The Federal Reserve’s statement sparked a move in the U.S. yield curve that’s been virtually absent of late.  The spread between 5- and 30-year yields widened after the announcement to 33.6 basis points, the highest since April 27. Curve steepening is a rare enough occurrence -- it’s near the flattest levels in more than a decade amid bets on continued gradual Fed rate hikes. But it’s the manner of the steepening that’s striking.  The world’s biggest bond market experiences so-called bull steepening when shorter-term Treasuries rally to a greater extent than their longer-dated counterparts. Indeed, five-year yields fell as much as 1.7 basis points and two-year yields dropped 1.2 basis points. In contrast, 10-year yields were flat and those on the long bond rose.

Concerns that the yield curve could eventually invert, with short-dated yields moving above long-dated yields, is keeping many on edge. An inverted yield curve has often preceded a recession.

In April, short rates continued to rise, but long rates could not quite keep pace, so the yield curve moved higher and continued to get flatter. The three-month (constant maturity) Treasury bill rate rose to 1.81 percent while the 10-year rate (also constant maturity) rose by 2 basis points to 2.88 percent.  These changes dropped the slope to 107 basis points, down from March’s 110 basis points and a full 20 basis points below February’s 127 basis points.   According to the Federal Reserve Bank of Cleveland, the incoming data had only a minimal impact on expectations of growth. Using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.5 percent rate over the next year.

The curve is collapsing partly because the Treasury is ramping up issuance of shorter maturities to fund expanding budget deficits.

Keep your eyes and ears open for this week’s auction of 30 year Treasury bonds.  At last month’s auction of the 30 Treasury bond, the high yield, at 3.044 percent, was 6.5 basis points below March’s awarded rate.  As of Friday, the 30 year Treasury was up to 3.122%.

The Treasury Department should sell more longer-dated debt to keep its borrowing costs down.

The department will notch higher sales of two- and three-year note auctions by $1 billion per month over the quarter, compared with monthly rises over the past quarter of $2 billion. It will also boost five-, seven-, 10-, and 30-year note sales by $1 billion starting in May and lift floating rate notes by $1 billion in May.

Heavy supply coming onto the market suggests higher yields.

Eurodollar futures settle at a three- month lending rate that has averaged about 22 basis points more than the Fed's target over the past 10 years.

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:

DEC18- 2.66
DEC19- 2.99
DEC20- 3.05
DEC21- 3.06
DEC22- 3.09
DEC23- 3.12
DEC24- 3.16

What does all this mean?

I don’t know.

The frangible long end of the yield curve as reflected in 30 year Treasury bond appear to be enervating any splenetic presentiment of a bigly recrudescence in interest rates by being quiescent and Eurodollar futures imply a quiescent Federal Reserve will not estivate.


A material is said to be frangible if it tends to break up into fragments.  Common biscuits or crackers are examples of frangible materials, which is why I am not allowed to eat them on the couch.

A frangible light pole base is designed to break away when a vehicle strikes it. This lessens the risk of injury to occupants of the vehicle

A frangible bullet is one that is designed to disintegrate into tiny particles upon impact to minimize their penetration for reasons of range safety, to limit environmental impact, or to limit the danger behind the intended target.  Too bad all bullets aren’t frangible.