As a result, money market funds send liquidity to the Fed overnight. The US central bank has an overnight facility where money market funds, banks and government funded mortgage underwriters can pledge overnight liquidity at 0% interest rate, and this facility saw nearly $ 433 billion in cash sent on Tuesday, the highest usage of this facility since late 2016, according to Bespoke Research. This was most often outside of the end of a quarter, a period when institutions often use the facility for regulatory reasons.

There are several reasons why pickup is used to park cash, called overnight repo service. First, the Treasury is reducing the amount of overdue bills before the debt ceiling is reinstated on August 1, reducing the supply of a key vehicle for investors to safely hold short-term liquidity. A second, more persistent reason is the Fed’s bond buying program, or “the massive tide of excess reserves that have flooded into the financial system as a result of [quantitative easing] purchases, which allow private sector assets to be exchanged for treasury bills and [mortgage-backed securities] for reservations, ”Bespoke Research analyst George Pearkes wrote in a Monday note.

And finally, the Treasury has started to release some of the aid it directs to states and local governments, according to

Barclays.

These municipalities may need to keep it invested in money market funds, treasury bills or bank deposits until they find use. This additional influx of liquidity into the system further stimulated the use of the Fed’s overnight repo facility.

However, the Fed has already taken steps to make it easier for institutions to use its reverse repurchase facility overnight. At its March meeting, it raised the limit on the amount of cash that an individual counterparty could commit overnight to $ 80 billion from $ 30 billion. And New York Fed staff members discussed expanding the scope of the facility to smaller companies and funds, to bring a more “diverse set of companies by size, business model and ownership to our counterpart base,” said Lorie Logan, director of the bank central. Open system market account, in an April speech.

By absorbing money that might otherwise go into bonds or short-term loan markets, which further reduced their yields, it helped the central bank to keep its policy rate above zero and within its range. target of 0% to 0.25%. The effective federal funds rate has remained above 0.05% this year and has remained above 0.06% for the past month, according to Bloomberg data.

But Barclays strategists say the Fed may need to take additional action to keep that rate within its range. They already expect the central bank to slightly raise the rate on its overnight repo facility and the interest it pays banks on excess reserves at its June meeting. If the rate appears to fall to or below 0.05%, the central bank could act sooner, the strategists wrote.

This means that the Fed’s key rate is unlikely to fall below zero. But there’s a reason investors are wary of short-term markets: They may offer safety and protection against loss when Treasury yields rise, but they offer no return.