EM LATAM CREDIT: Colombia Central Bank Surprise Rate Cut

With the Fed having tapered Treasury QT in light of potential volatility in funding markets, now adding to the list of reserve scarcity indicators are Fed board economists who Friday published "Monitoring Reserve Scarcity Through Nonbank Cash Lenders" (link here).

• The authors write: "We focus on two critical nonbank suppliers of liquidity to money markets: money market funds (MMFs), the largest providers of cash in repo markets, and the Federal Home Loan Banks (FHLBs), the largest providers of cash in the federal funds market. Our institution-based approach complements approaches that use aggregate market-based indicators for monitoring scarcity.6 We show that four new indicators based on these institutions' cash supply can help discern early informative signals about reserve scarcity:
  • "The proportion of MMF repo lending above the interest rate on reserve balances (IORB);"
  • "The elasticity of MMF repo spreads to the balance in Treasury General Account (TGA);"
  • "Volume and rates in the "true" domestic interbank fed funds market (i.e., transactions that do not involve FHLBs as lenders);"
  • "FHLBs' lending in the fed funds market at rates below their repo rates."
• The authors note that each of these indicators pointed to rising pressures as early as Q1 2019, ahead of the September 2019 ructions in money markets. At present, "Our indicators currently show that reserves remain abundant. However, a couple of our indicators provided some potential signs of emerging scarcity in the fourth quarter of 2024. Although these signals appear to have been temporary, they suggest that close monitoring of our indicators is warranted."
• The chart below shows the elasticity of MMF repo spreads to the balance in the TGA - potentially of increasing interest given the onging rundown of cash balances associated with the debt limit impasse. "Increases in the TGA balance mechanically and exogenously reduce reserves, placing more pressure on banks' buffers. As reserves become less abundant and dealers rely more on MMFs for repo lending, this elasticity is expected to increase. This is because the repo rates dealers offer to MMFs become more sensitive to fluctuations in reserves that change the availability of funding from banks."

• RES 4: 0.8494 High Aug 26 ‘24        
• RES 3: 0.8474 High Jan 20 and a key resistance
• RES 2: 0.8428/8450 High Mar 18 / 11 and the bull trigger
• RES 1: 0.8395 High Mar 24 and a key near-term resistance       
• PRICE: 0.8357 @ 14:36 BST Mar 31 
• SUP 1: 0.8316 Low Mar 28
• SUP 2: 0.8291 76.4% retracement of the Mar 3 - 11 bull leg
• SUP 3: 0.8251 Low Mar 4  
• SUP 4: 0.8241 Low Mar 3 and a key support 

The move down in EURGBP that started Mar 11 still appears corrective and has allowed a recent overbought condition to unwind. Note that MA studies are in a bull-mode position, highlighting a dominant uptrend. Support to watch is  0.8316, the Mar 28 low. A break of this level is required to signal scope for a deeper retracement that would open 0.8290, a Fibonacci retracement. For bulls, clearance of  0.8395, the Mar 24 high, would be a bullish development.     

• Date $MM Issuer (Priced *, Launch #)
• 03/31 $Benchmark Japan Tobacco +3Y, +5Y, +10Y investor calls
• 03/31 $Benchmark Gold Fields 10Y investor calls
• 03/31 $Benchmark Caf perpNC5.5 investor calls
• Expected Tuesday:
• 04/01 $Benchmark Kommunalbanken Norway 4Y SOFR+41a
• 04/01 $Benchmark NRW Bank 5Y SOFR+49a
• 03/31 $Benchmark DBJ 5Y SOFR+62a