NeilW wrote:dealtn wrote:The fact that bank reserves don't move in price but Gilt's do?
Bank reserves do move relative to other currencies - as anybody who as actually worked in a bank should know. Most banks being operative in more than one jurisdiction.
The liquidity in Gilts is guaranteed by GEMMS and the Bank of England - therefore they have the same liquidity profile as bank reserves. And they don't move very much at the short end where Banks hold their reserve assets due to the pull to the maturity. Hence why Pension Funds like longs and Banks like the short to medium end.
And the whole thing is a reflection of the belief of the market in the interest rate curve - forced into place by the Bank of England doing QE if necessary. And the market is just a waterbed of people playing push-me-pull-you.
So no I reject your argument. It is a micro position, not a macro one.
I have worked in a bank (as you know - and to a quite senior level), and accept reserves move with respect to currency. Thank you for adding an additional reason why reserves are different to Gilts from a bank perspective which is odd given your argument that from a bank's perspective they are the same!. To be fair I didn't introduce this myself as it is also the case that banks will hold foreign bonds too, not just gilts and indeed "credit" bonds such as bank and corporate bonds too.
If you go to a bank's statutory accounts, scroll down to the "risks" section (now obligatory) and you will see against bank reserves they will say "interest rate risk", and against gilts (etc.) it will say "interest rate risk", "currency risk", and "credit risk". This highlights, from the "bank perspective", which appears to be where you are arguing from, how differently they assess them.
Liquidity in Gilts is not "guaranteed" by GEMMs, in theory or in practice. In theory it is liquid, but within the confines of quoted price, in practice there are many times Gilts won't be quoted by individual GEMMs, and even if they were, that "guarantee" only exists within the operations of approved Gilt counterparties, which won't extend to every bank, let alone every counterparty. Even then a GEMM guarantee is only as good as the balance sheet, and business operations of that GEMM. Are you suggesting this guarantee is as good as the Central Bank?
You seem to be under the illusion a 2 - 5 year Gilt can't move in price. That doesn't stand up to the scrutiny of market reporting, even over periods where there is no change in interest rate policy. This is true long before "QE" which somehow you think relevant to the argument on how bank's see their assets on their balance sheet, or during "QE" (and after "QE" too!).
Reject my argument if you like, but it won't make it any less true, the same way you wouldn't argue a bank overdraft was the same as a tradeable bond, or a £ in someone's wallet was the same as one invested in a bitcoin wallet.
Assets come in many forms, as do liabilities, and that is recognised by banks (and their regulators) too. If you think that isn't the case, and that banks produce annual accounts of extraordinary length, and at some cost, for the fun of it, then you are happy to live with that illusion. It doesn't make it the real world though.