One for the roadVIDEO best played on loudest volume, enough to shake the cavethedailyeconomy.org Repo Market’s Warning Light is Flickering Peter C. Earle 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) 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. US Repurchase Agreements Overnight Total Value Accepted, 2021 – present (Source: Bloomberg Finance, LP) 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.Secured Overnight Financing Rate (blue) & US Federal Reserve Interest on Reserve Balances (white), October 2024 – present (Source: Bloomberg Finance, LP) 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 . PETER C. EARLE 
