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Bank reserves are still ample — but for how much longer? By Investing.com

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Barclays analysts warn that while bank reserves remain plentiful, their abundance may not last long. The Barclays analysis suggests that the transition to a steeper part of the reserve demand curve, where prices start to move higher, could occur when reserves reach about $3.1 trillion.

Analysts expect the quantitative tightening policy to end in December.

Barclays says reserves are not currently scarce, as evidenced by the stable spread between FF and IORB, which has remained at -7 basis points since the US Federal Reserve started raising interest rates.

However, the bank notes that this spread may soon start to narrow. “The demand curve for banks’ reserves is nonlinear, and the sensitivity of the spread between US Treasury and foreign bond rates to changes in the level of reserves increases as these holdings shrink,” the note notes.

Barclays stresses the importance of monitoring changes in the slope of the reserve demand curve, or the elasticity of the demand for money, to identify the shift from abundant to scarce reserves.

According to their models, banks are approaching the steepest part of this curve, which has reserves estimated at about $3.1 trillion, assuming reverse repurchase agreement balances are close to zero.

They point out that the Fed faces uncertainty about the pace at which quantitative easing will push banks into this steep part of the demand curve.

Barclays notes that the reserve demand curve may have shifted, meaning that banks may want to hold more reserves at each level of the spread between foreign bonds and international bonds. In response to these doubts, the Fed has begun to reduce Treasury withdrawals, signaling a cautious approach.

Barclays concludes that “there are currently no signs of a scarcity of reserves,” as indicated by the flat, negative spread between FF-IORB and other market indicators. However, analysts warn that this situation could change, stressing the need for close monitoring as the year progresses.

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