A resurgence of instability in short-term funding markets has emerged, challenging the Federal Reserve’s recent attempts to stabilize financial conditions. Key benchmarks indicate growing strain, particularly in repurchase agreement (repo) financing.
- SOFR surged to 5.8% in early December, up from 4.1% in October
- Daily repo facility utilization averaged $85 billion in late November and early December
- 1-month Treasury bill yield rose to 5.45%
- TED spread reached 125 basis points, its highest since March 2023
- Outstanding repo market volume declined due to reduced Treasury collateral availability
- Money market funds and broker-dealers are increasing cash reserves amid funding uncertainty
Recent data shows a sharp uptick in overnight repo rates, with the secured overnight financing rate (SOFR) spiking to 5.8% in early December, up from a lows of 4.1% in mid-October. This marks the highest level since the 2022 liquidity crunch, signaling renewed pressure in the $15 trillion U.S. repo market. The spike coincides with a notable decline in the volume of available collateral, particularly Treasury securities, as institutions reduce their balance sheet exposure amid tighter regulatory scrutiny. The Federal Reserve’s ongoing $1.2 trillion in standing repo facility operations has helped absorb some of the strain, but utilization remains elevated, averaging $85 billion daily during the past two weeks — nearly double the prior-month average. Market participants are increasingly concerned about the sustainability of short-term funding, especially as the December 18 meeting approaches. The yield on the 1-month Treasury bill rose to 5.45%, reflecting investor hesitancy to extend credit beyond the near term. Meanwhile, the TED spread — a key gauge of perceived credit risk — widened to 125 basis points, its highest since March 2023. Institutions with high reliance on overnight funding, including major money market funds and broker-dealers, are adjusting positions and increasing cash holdings. This defensive posture could dampen market liquidity and amplify volatility if conditions worsen. The Federal Reserve’s next policy decision will be scrutinized closely for signals on potential rate cuts or further liquidity support.