EM LATAM CREDIT: Colombia: Tax Reform – Negative
(COLOM; Baa3/BBneg/BB+neg)
• Lawmakers are set to vote tomorrow on the tax bill which seeks to raise COP16tn (USD4.2bn), according to Bloomberg. The latest initiative from the Petro government proposed to ban the tax deduction on royalty payments for oil and gas producers, primarily used by govt-owned Ecopetrol. Some of the tax reforms proposed in past months by the government such as fuel taxes have already been blocked and in their place have come new ideas such as the royalty tax.
• Petro’s tax reform in 2022 banned the royalty tax deduction and was supposed to add over USD800mn to the government’s annual revenue at the time, according to Reuters, but a constitutional court struck down the measure in 2023 as being unconstitutional. Now the plan is being resurrected again but how likely is it that its constitutionality has changed?
• COLOM 8% 2035s were quoted T+280bp, or a yield of 6.99%, 86bp tighter since June 30th and 53bp tighter YTD. The persistently negative view of the country’s finances, inflation and politics led to a lack of investor sponsorship for Colombia sovereign bonds in the first half of 2025 but that changed dramatically in the second half as the head of public credit announced a plan to buyback USD debt financed with CHF loans and EUR debt issuance. With USD buybacks done for a while, bond traders resumed their focus on fundamentals.
• Optically, the fiscal deficit has improved from what was projected to be 7.1% this year to more like 6.7% thanks to the bond buybacks; however, that is still a substantial deficit that needs to be financed. The government has resisted cuts in spending and instead has opted to propose tax hikes which seem to have little chance of passage in the congress.
• Inflation has remained stubbornly high and that has made policy rate cuts unlikely and rate hikes possible. That is important because with the primary budget deficit of about 2%, the remaining fiscal deficit is made up of interest costs, which don’t seem likely to improve and could get worse. On a positive note, economic growth has surprised to the upside with the latest Q3 reading at 3.6% vs a 3.2% consensus and 2.1% in Q2.
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FED: Fed Assets Pull Back, But Reserve Management Buys Eyed In 2026 (2/2)
Indeed NY's Williams has already begun pointing to potential for balance sheet re-expansion to begin again, with "reserve management" purchases intended to keep Fed liabilities rising in line with market demand:
- "Looking forward, the next step in our balance sheet strategy will be to assess when the level of reserves has reached ample. It will then be time to begin the process of gradual purchases of assets that will maintain an ample level of reserves as the Fed’s other liabilities grow and underlying demand for reserves increases over time. Such reserve management purchases will represent the natural next stage of the implementation of the FOMC’s ample reserves strategy and in no way represent a change in the underlying stance of monetary policy."
- The prevailing consensus is that such reserve management purchases will begin by the end of Q1 2026 if not earlier, with t-bills bought and in amounts of up to $20B a month.
- Meanwhile in the final countdown to the end of QT on December 1, net SOMA runoff was around $4B in the last week, with a pace of around $20B overall over the last month.
- Takeup of the Fed's lending facilities pulled back in the week to Wednesday Nov 5, halving to just over $11B as month-end pressures abated. This was due almost entirely to a $10.2B drop in dealer repo operation takeup, the spike in which last week marked the highest since 2020.
FED: Reserves Tick Up Slightly In Latest Week, But Still Near "Ample" (1/2)
The Fed's latest H.4.1 release on Nov 5 showed reserves picked up from the prior week's post-2020 lows to $2.85T, up $24B in the latest week but still down $182B over the last month.
- This of course has been the mirror image of movements in the Treasury General Account which briefly touched $1T though settled Wednesday at $943B (a fall of $41B on the week, but a rise of $149B in a month).
- Treasury indicated this week that it maintained its $850B quarter-end cash target, with the recent buildup due in part to the federal government shutdown slowing outflows but also a typical cautionary cash rase ahead of large seasonal expenditures.
- The Fed's reverse repo facilities remained in relatively negligible territory albeit with a slight pickup at month-end October.
- Overall the Fed has recognized that it may be getting close to the transition point between once-"abundant" and now merely "ample" reserves, hence October's decision to end net asset runoff as of Dec 1.
- NY Fed President Williams said Friday morning “Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves."
FED: Financial Stability Report Eyes Term Premia And "Opaque" Financing Risks
A few highlights from the Fed's latest Financial Stability report out today (link):
- In terms of asset valuations, "Prices remained high relative to their historical relationship with fundamentals across a range of markets."
- The report highlights high leverage in the financial sector: "Vulnerabilities associated with financial leverage remained notable. Over the past few years, hedge funds’ leverage has steadily increased across a broad range of strategies, including those involving Treasury securities, interest rate derivatives, and equities"
- However "Vulnerabilities from business and household debt remained moderate" and "The banking sector remained sound and resilient overall, and most banks continued to report capital levels well above regulatory requirements."
- In terms of future risks, "A further increase in term premiums leading to higher-than-anticipated long-term interest rates, particularly if accompanied by
persistent inflation, could pose risks for both borrowers and lenders" - And the Fed has its eye on "opaque off-balance-sheet funding arrangements" re the recent voliatility caused by First Brands and Tricolor: "The recent bankruptcies of two privately held firms, an auto parts supplier and a subprime auto lender, so far appear to be isolated events. However, these examples highlight that unexpected losses could arise from opaque off-balance-sheet funding arrangements that may be used by certain privately held firms."
