This week, a crucial interest rate in the U.S. financial system surged significantly, exceeding the Federal Reserve's established target range. This development stems from ongoing liquidity reduction driven by U.S. Treasury auction settlements and the approaching quarterly corporate tax payment deadlines.

According to the latest data released by the New York Fed on Tuesday, the Secured Overnight Financing Rate (SOFR) climbed from 4.42% in the previous trading session to 4.51% on September 15, marking the largest increase for this rate since December 31 of last year. This short-term lending benchmark is closely tied to repurchase agreement market activity.

The rise has widened the gap between SOFR and the effective federal funds rate to 18 basis points—the largest spread since December 26 last year. Policymakers are expected to cut the federal funds rate by 25 basis points on Wednesday. The rate now stands 11 basis points above the interest rate the Fed pays on reserves deposited at the central bank, which currently sits at 4.40%.

Overnight funding rates used by banks and asset management companies for mutual lending have been steadily climbing as the U.S. Treasury expands its cash reserves while the Federal Reserve reduces the size of its balance sheet. Meanwhile, usage of the Fed's overnight lending facility—long considered an indicator of excess liquidity in money markets—has fallen to four-year lows.

Since early September, repo rates have exceeded the Fed's overnight lending rate target range and have remained elevated since then. Despite the recent sharp rise in benchmark rates, market participants still anticipate a brief period of calm before quarter-end, followed by increased market volatility. This expectation is based on the upcoming expiration of two long-term Cash Management Bills (typically with maturities under one month), which will result in $50 billion in net supply being repaid, along with substantial cash inflows from government-sponsored enterprises' monthly contributions in the coming days.