Fed buying, record repo facility use steady year-end US funding markets

• Banks borrowed a record $74.6 billion through the Fed's Standing Repo Facility at 3.75%, below market rates of 3.9%, demonstrating the Fed's safety valve is working effectively
• SOFR repo rates climbed to a two-week high of 3.77% on Monday before easing to 3.71%, reflecting tighter but manageable liquidity conditions
• Market participants noted significantly reduced year-end funding stress compared to expectations a month ago, with no major dislocations in funding-driven markets

Fed Actions Stabilize Year-End Funding Markets

U.S. short-term funding markets experienced typical year-end pressures, but Federal Reserve interventions successfully prevented major liquidity disruptions. The Fed's Standing Repo Facility (SRF) saw record usage of $74.6 billion on Wednesday, as banks borrowed from the central bank to meet funding needs.

The Secured Overnight Financing Rate (SOFR), a key measure of repo rates, climbed to a two-week high of 3.77% on Monday before easing to 3.71% on Tuesday. While elevated, these rates remained controlled compared to previous year-end periods, largely due to the Fed's resumed purchases of short-term government debt earlier this month.

Market participants noted significantly reduced stress compared to expectations from a month ago. The general collateral repo rate reached approximately 3.9% on Wednesday, above the SRF's 3.75% rate, incentivizing banks to borrow from the Fed rather than the open market. This dynamic demonstrated the effectiveness of the Fed's automatic market mechanisms in managing funding pressures.

TD Securities strategist Jan Nevruzi observed that without Fed intervention, year-end funding stress would have been substantially worse. Scott Skyrm of Curvature Securities highlighted that the surge in SRF usage was a "constructive sign," indicating the Fed's tools are working as designed to correct funding deviations.

The typical year-end pattern occurs as banks pull back on lending to manage balance sheets and conserve cash, creating scarcity in short-term funding markets. However, this year's pressures remained manageable with no significant dislocations in funding-driven markets, demonstrating the Fed's successful liquidity management during a traditionally volatile period.