Certain segments of the global money markets are under pressure as governments ramp up debt issuance while central banks gradually withdraw accommodative monetary policies, leading to capital draining from the financial system.
Key secured lending indicators in both the US and the UK have risen to levels not seen in years. Although driven by different factors, signs of tightening liquidity are emerging across markets.
These shifts suggest normalization after years of central bank bond purchases flooded funding markets with excess liquidity. However, investors remain wary of risks, such as a repeat of the September 2019 spike in US short-term rates that roiled markets—prompting the Federal Reserve to inject $500 billion into the financial system.
"Global money markets need to find their footing in a world where reserves are no longer abundant," said Michiel Tukker, senior rates strategist at ING. "While central banks now have tools to inject liquidity if needed, the question is whether it can reach where it’s needed."
The Fed announced on Wednesday that it will halt the reduction of its Treasury holdings starting December 1, ending a three-year balance sheet contraction amid rising market stress signals. Meanwhile, the Bank of England has encouraged financial institutions to borrow through its repo financing facility to minimize excessive volatility risks.
Below is an overview of key indicators across global markets:
**United States** The Fed’s primary liquidity tool, the reverse repo facility, has seen near-zero usage, while bank reserves have declined as the US government rebuilds cash buffers after raising the debt ceiling this summer, and the central bank continues tightening its portfolio.
As a result, short-term rates across money market instruments for interbank lending have risen and remained elevated since early September.
The overnight general collateral repo rate briefly hit 4.32% on Friday, exceeding the Fed’s benchmark rate—the effective federal funds rate—currently within the 3.75%-4% range. This signals reduced dollar liquidity in the financial system, especially after the Fed trimmed its balance sheet by about $2.2 trillion over the past three years.
Benchmark rates tied to repo transactions, such as the Secured Overnight Financing Rate (SOFR) and the Tri-Party General Collateral Rate, have surpassed the interest on reserve balances (IORB), the rate the Fed pays banks on reserves. Dallas Fed President Lorie Logan has noted that money market rates should stay near or slightly below the IORB.
This marks the first time since 2019—excluding month-end or auction settlement periods—that these rates have risen above the Fed’s target range.
The repo rate surge has driven market participants toward the Fed’s liquidity tools, some introduced as backstops after the 2019 turmoil. The Standing Repo Facility (SRF), which allows eligible institutions to borrow against Treasury and agency debt collateral, has seen increased usage in recent weeks. On Friday, counterparties borrowed $20.4 billion in the first of two daily operations—the highest since the facility became permanent in 2021.
**United Kingdom** Sterling repo rates have grown more volatile as the Bank of England continues unwinding its gilt portfolio and banks repay pandemic-era low-cost loans. This week, the SONIA (Sterling Overnight Index Average), measuring overnight repo costs among market participants, climbed to 4.28%, above the BOE’s 4% deposit rate.
According to WMBA Ltd., this premium is the widest since March 2020, excluding quarter-end periods.
**Europe** European funding markets remain relatively calm, with core repo rates showing little stress. However, signs of tightening liquidity are gradually appearing in unsecured lending rates.
Euro short-term rates have edged closer to the European Central Bank’s deposit rate, with the spread narrowing to its tightest since 2021. This reflects rising funding demand as excess liquidity is drained from the eurozone financial system.