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Fed buying, record repo facility use steady year-end US funding markets
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Fed buying, record repo facility use steady year-end US funding markets
Mar 10, 2026 11:32 PM

NEW YORK, Dec 31 (Reuters) - U.S. short-term funding markets saw some of the usual year-end tension this week, but the Federal Reserve's renewed buying of short-term government debt and heavy use of its Standing Repo Facility helped keep cash flowing and prevented a bigger liquidity squeeze, market participants said.

Short-term borrowing costs often rise at quarter- and year-end ‌as banks pull back on lending to conserve cash and manage balance sheets. That seasonal pattern has pushed rates on repos - the short-term loans ​backed by Treasuries and other securities that banks and hedge funds rely on for cheap funding - ‍above normal levels in 2023 and made them volatile in late 2024.

Reflecting tighter ⁠liquidity, repo rates measured ⁠by the Secured Overnight Financing Rate (SOFR) climbed in recent days, reaching a more than two-week high of 3.77% on Monday before easing to 3.71% ‌on Tuesday, according to the latest available data by ​the Federal Reserve Bank of New York. 

Still, the pressures were lower than would have likely been the case if the Fed had not returned as an active buyer ⁠of short-term U.S. government debt, said Jan Nevruzi, U.S. ‍rates strategist ​at TD Securities. The Fed began purchasing short-dated Treasury bills earlier this month to better manage market liquidity and maintain control over interest rates.

"If you had asked people a month ago ‍how year-end was going to go through, I think people were a lot more worried that it was going to be substantially more stressful than it is now," said Nevruzi. 

"There's always people who want to clean up balance sheets into year-end and so the cash going around becomes a lot more scarce and harder to get ... but we haven't seen any dislocations in other funding-driven markets," he added. 

At the same ​time, banks ‍turned heavily to the Federal Reserve Bank of New York's Standing Repo Facility (SRF), which acts as a safety valve by allowing eligible firms to borrow cash from the central bank in ​exchange for high-quality collateral such as Treasuries.

On Wednesday, U.S. banks borrowed a record $74.6 billion through the facility, after the New York Fed encouraged institutions to use it more actively. 

The surge in SRF usage was a constructive sign for funding markets, said Scott Skyrm, executive vice president at Curvature Securities in New York.

He noted that the general collateral (GC) repo rate, which is the cost of borrowing cash against Treasuries or similar securities, was about 3.9% early on Wednesday, higher than the ​SRF's 3.75% rate. That gave banks an incentive to borrow from the Fed at a cheaper rate instead of turning to the open market. 

"It's a good indication that the automatic market mechanisms that the Fed has put in place to correct funding pressure and ‍deviations from the target range is starting to work," said Skyrm.

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