The US Treasury building in Washington experienced a surge in the Secured Overnight Financing Rate, hitting 4.51% on Sept. 15, the highest level this year. This spike has been attributed to dwindling liquidity due to Treasury auction settlements and quarterly corporate tax payments.

Rates on overnight financing are rising as the Treasury boosts its cash reserves while the Federal Reserve trims its balance sheet. The spread between the Secured Overnight Financing Rate and the effective fed funds rate widened to 18 basis points, the largest gap since December 26.

Persistently high overnight rates could impact the Fed’s ability to continue unwinding its balance sheet without draining liquidity from the financial system. The Fed has been reducing its balance sheet since 2022, aiming to maintain bank reserves at a level considered ample to prevent market disruptions.

Benchmark rates are expected to remain under pressure as the government increases Treasury bill issuance, draining the Fed’s overnight reverse repurchase agreement facility. Despite this, market participants anticipate a temporary reprieve before quarter-end volatility picks up again. Paydowns and cash influx from government-sponsored enterprises may provide relief in the coming days.

Read more at Yahoo Finance: US Short-Term Rate Jumps to Year High as Funding Strains Grow