The cost of borrowing cash overnight on the last day of the year has surged despite the Federal Reserve’s injection of billions of dollars into markets in an attempt to ease strains, raising concerns that investors may be in for a volatile final few weeks of 2019.

The so-called repo rate paid by investors to borrow cash overnight in exchange for Treasuries and other high-quality collateral rose to 3.95 per cent on Thursday, for pre-agreed contracts kicking in on December 31.

That is up from just over 3 per cent a month ago, according to data provided by Curvature Securities, and well in excess of the current overnight repo rate of around 1.6 per cent.

The high rate is a sign of investors’ strong demand to secure funding over the end of the year, when banks typically pull back from lending in the repo market as they seek to shrink their balance sheets ahead of important regulatory calculations.

Some investors note that a bout of stress sent borrowing costs sharply higher in September, and fear that markets could be set for more turmoil over the next few weeks.

“We are going to see some kind of spike at year-end,” said Nick Maroutsos, co-head of global bonds at Janus Henderson. “What degree or magnitude remains to be seen, but I can’t imagine we won’t see something as bad or worse than what we saw in September.”

The US central bank has attempted to alleviate concerns by injecting billions of dollars into the repo market through short-term loans extending into 2020.

So far, the Fed has funnelled $50bn into the market over the course of two operations. This week it increased the size of its next operation, to be held on Monday, from $15bn to $25bn, as it responds to the high demand for cash.

“It may concern the Fed if this rate does not come down,” said Geoff Allen, head of repo trading at Barclays. “Seeing these operations go through and have limited impact on the market at the end of the year, with sustained pressure into January, indicates there is still a cost to get access to dealer balance sheet.”

The year-end rate has already soared past levels seen at the same point in 2018, when indicative funding costs for New Year’s Eve were around 2.8 per cent. They eventually reached 6 per cent on December 31, according to the data. In September this year, in the midst of the repo turmoil, rates rose as high as 10 per cent.

Investors said that without the cash already made available by the Fed, borrowing costs would be even higher now.

Nonetheless, a spike could be unavoidable, according to Mr Maroutsos, because the Fed is so far underestimating both the problem and its ability to fix it.

“Just because they flood the market with liquidity doesn’t mean the banks are going to lend it out,” he said.

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