After several years of calm, stress is again building in the hidden plumbing of the US financial system — the short-term funding markets that move trillions of dollars in overnight cash and securities each day. These markets, particularly the repurchase (“repo”) market and its benchmark Secured Overnight Financing Rate (SOFR), are critical to the smooth functioning of the financial system. When they seize up, the consequences ripple outward into Treasury trading, bank liquidity management, and even the implementation of monetary policy.
The last time the repo market buckled, in September 2019, it happened suddenly and dramatically: overnight borrowing rates spiked from around two percent to more than eight percent, exposing how fragile the post-crisis liquidity framework had become. When corporate tax payments and the settlement of a large Treasury auction drained roughly $120 billion in cash from the system in a single day, major banks — constrained by liquidity coverage rules and post-Basel capital surcharges — hoarded their reserves. The result was a stunning jump in repo rates, a one-day surge in SOFR to 5.25 percent, and a near-immediate intervention by the New York Fed, which pumped up to $100 billion per day into the market to restore order. In other words, a sudden cash drain caused the usual lenders in overnight markets to step back all at once, leaving borrowers scrambling for funds and driving rates sharply higher — a classic liquidity squeeze rather than a credit panic. The episode taught regulators a humbling lesson: in a world of regulatory liquidity floors, “ample reserves” can prove illusory when those reserves become unevenly distributed.
Secured Overnight Financing Rate, 2018 – 2020
(Source: Bloomberg Finance, LP)
A simple chart of daily SOFR from 2018 through 2020 captures the point clearly. The September 2019 spike (see above) appears as a sharp vertical wall — an almost instantaneous loss of equilibrium — while the more recent uptick of late 2025 looks tame but unmistakably directional. In both cases, seemingly minor reserve drains exposed just how nonlinear the system becomes near its lower comfort limit.
Fast-forward six years, and some familiar symptoms are re-emerging. Signs of renewed short-term funding stress have begun to surface across US money markets. Nothing approaching the 2019 spike has yet occurred, but the tremors are unmistakable. In mid-September 2025, the Federal Reserve’s Standing Repo Facility (SRF) was tapped for roughly $18.5 billion in a single day — its largest draw since inception — suggesting that banks were again leaning on official backstops for liquidity. Around the same time, SOFR rose to about 4.42 percent, and related secured funding benchmarks such as the Tri-Party General Collateral Rate (TGCR) climbed in tandem. By October 16, SOFR remained elevated near 4.3 percent, underscoring lingering tension despite some easing.
Recent news of souring debt on bank balance sheets, along with the sudden failures of both First Brands Group and Tricolor Holdings, are likely key drivers of the abrupt rise in risk aversion across bespoke lending markets. The tightness may, additionally, be attributable to familiar quarter-end forces that periodically drain liquidity: tax deadlines, Treasury settlement flows, and a surge in short-term debt issuance that competes for cash.
Analysts at the Dallas Fed observed that in the first week of September 2025, SOFR rose by five to eight basis points and TGCR by about 10 basis points to roughly 4.50 percent — modest but telling moves that reveal a system operating with thinner cushions. The repo market, where Treasuries serve as collateral for overnight borrowing, is the circulatory system of modern finance. When reserves are plentiful, small shocks are absorbed easily; when they are tight, even routine settlement flows can push funding rates up.
US Repurchase Agreements Overnight Total Value Accepted, 2021 – present
(Source: Bloomberg Finance, LP)
From a monetary-plumbing perspective, these recent developments suggest that the “ample reserves” framework may again be brushing up against its lower comfort limit. When reserves approach banks’ internal liquidity minimums, the demand curve for cash becomes steep and inelastic, meaning that small drains can cause disproportionate moves in funding rates. The September–October tightening appears to fit that pattern. Large Treasury settlements and tax flows drew cash out of dealer accounts just as bill issuance surged, forcing funds and banks to pay more for liquidity. The SOFR-to-IORB (Interest on Reserve Balances) spread widened slightly, and rising SRF usage confirmed that private lenders were hesitant to meet the marginal demand on their own. A chart of SOFR minus IORB over the past two years would show this spread drifting steadily higher — a visual sign of creeping stress beneath otherwise orderly surface conditions.
Although reserves today are far higher than in 2019 and the Fed’s SRF provides a ready backstop, the same structural sensitivities remain. Quarter-end strains, elevated secured rates, and heavier use of official facilities all point to a system once again edging toward the boundary where small imbalances can amplify. The Dallas Fed has cautioned that funding conditions are still “ample” but trending toward constraint — a diplomatic way of saying the buffer is thinner than it looks.
The SRF itself has become a kind of canary in the coalmine. A simple bar chart of its daily usage since 2021 reveals a long stretch of near-zero take-up interrupted by a sudden, towering spike in mid-September 2025. What makes that surge meaningful is not the absolute amount — $18.5 billion is manageable in a $25 trillion market — but that it happened absent any major policy shift or market shock. It was, in effect, a voluntary stress test of the system’s plumbing, and the results were mixed.
Several variables now deserve close scrutiny: the level of excess reserves above banks’ internal minima, dealer balance-sheet capacity under regulatory capital rules, and the behavior of key spreads such as SOFR versus the Effective Federal Funds Rate (EFFR) or the IORB floor. Sustained SRF usage would suggest that stress is migrating from the periphery toward the core of the funding network. Meanwhile, aggregate reserve balances plotted against the Fed’s total assets tell another story — reserves are declining even as Treasury issuance expands, tightening the effective supply of cash collateral. So far, none of these red lights are flashing, but several are flickering amber.
Secured Overnight Financing Rate (blue) & US Federal Reserve Interest on Reserve Balances (white), October 2024 – present
(Source: Bloomberg Finance, LP)
Forward SOFR contracts already price roughly 7–8 basis points above EFFR for late-year settlements, hinting at expectations of continued tightness. Treasury issuance remains historically heavy, and money-market funds now play an even larger role as collateralized lenders, leaving banks somewhat more reliant on the Fed’s standing facilities. From a free-market, liquidity-plumbing perspective, the message is clear: this is not yet a crisis, but the system’s margin for error is narrowing.
The elevated repo prints are manageable thanks to stronger buffers and improved tools, but they highlight how even moderate drains can test the architecture of post-crisis money markets. If an unforeseen fiscal event, a major settlement failure, or a sudden dealer retrenchment were to occur, a sharp jump in funding rates could reappear overnight. Money-market plumbing is once again creaking under strain. Similar indications were seen in the months before the collapse of Silicon Valley Bank and a handful of other financial institutions.
Presently, the situation remains under control but is clearly leaning toward stress — an early warning, not a five-alarm fire. Markets are still functioning, but more delicately balanced than policymakers might prefer. If funding conditions tighten further or freeze up entirely, intervention will almost certainly follow — bringing with it the familiar mix of short-term relief, long-term distortions, and the ever-present risk of cascades and collateral damage.
