Excess cash in the financial system has pressured overnight interest rates, in some instances pushing them negative, which, analysts said, could prompt the Federal Reserve to lift the short-term rates it manages.
The overnight repurchase rate, which measures the cost of borrowing short-term cash using Treasuries or other debt securities as collateral, dropped to as low as -0.06% in late March and hit that level again on Wednesday, before stabilizing at around 0.01% on Friday.
The U.S. secured overnight financing rate (SOFR), a short-term reference rate replacing the benchmark London interbank offered rates (LIBOR), has been pinned to 0.01% since about March.
Analysts said the Fed wants to avoid SOFR going negative as it comes with significant operational issues with respect to its components.
As short-term rates continued to approach negative levels, expectations are growing that the Fed may soon lift the rate it charges for the loans to nonbanks at its reverse repo window, currently at 0%, as well as the interest it pays banks for excess reserves (IOER), which is 0.10%.