Finding an equitable life

Research evidence excerpt

Finding an equitable life

Barclays | UK Rates Strategy

b. A high usage/rising WAM regime implies a shift into the ILTR as banks lock in term

funding and liquidity insurance from the ILTR. We would interpret this as balance sheet

demand becoming more structural and as a broader normalising of money market

conditions.

The 'WAM vs usage' metric is likely to become increasingly central to analysis of overall liquidity

conditions, in particular regime transitions from high to low WAM environments. We can group

the signals with attribution and market signs as summarised in Figure 15.

FIGURE 15. WAM vs OMO signals: a qualitative interpretation

WAM signal OMO signal Cause Market signs

Sharp compresssion STR spike Calendar turns Secured/unsecured rate vol

Collateral stress BOE/Sonia tightening?

Reserve shortages Increasing GC specialness?

Persistently low WAM Significant STR increases Reserve scarcity Use of OSF?

Reducing ILTR usage Moves in SONIA/RONIA volumes

Upward pressure in market rates

Divergent usage /steady WAM ILTR take up rising "BAU" Functioning market framework

STR broadly static

Source: Barclays Research

Something of a liability: reserve provision viewed as a liability manager

On numerous occasions, the BOE has outlined that it envisages a steady state world where the

demand for reserves will be largely met by its repo operations. Both speeches and policy

documents have previously shown stylised charts where the APF is run down to zero with the

entire reserve base backed by repo assets. While this wholly removes interest rate risk from the

BOE's balance sheet – an objective that Governor Bailey highlighted in his Goodhart Lecture in

2024 – the estimated interest rate risk associated with the APF gilt portfolio has declined from a