Bank reserves remain plentiful, but for how much longer? By Investing.com

Barclays analysts warn that while bank reserves remain plentiful, their abundance may not last much longer. Barclays' analysis indicates that the transition to a steeper part of the reserve demand curve, where rates begin to rise, could occur when reserves reach around $3.1 trillion.

Analysts expect quantitative easing (QT) to be completed in December.

Barclays currently says reserves are not in short supply, as evidenced by the stable spread between FF and IORB, which has remained at -7 basis points since the Fed's rate hikes began.

However, the bank warns that this spread could soon begin to narrow. “The demand curve for banks' reserves is not linear and the sensitivity of the FF-IORB spread to changes in the level of reserves increases as these balances are reduced,” the note states.

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

According to their models, banks are approaching the steepest part of this curve, estimated at around $3.1 trillion in reserves, assuming near-zero reverse repurchase agreement (RRP) balances.

They note that the Fed faces uncertainty about the pace at which quantitative monetary policy will push banks toward this steep part of the demand curve.

Barclays notes that the demand curve for reserves may have shifted, meaning banks may want to hold more reserves at all levels of the FF-IORB spread. In response to these uncertainties, the Fed has begun to gradually reduce Treasury bond cuts, signalling a cautious strategy.

Barclays concludes that there are “no signs of reserve shortages at present”, as indicated by the FF-IORB spread, which remains flat and negative, and other market indicators. However, analysts warn that this situation could change and stress the need for close monitoring as the year progresses.