JPM JP Morgan Chase and Co

Money-market funds, banks and other eligible financial institutions plowed $412.5 billion into a Federal Reserve overnight investment facility Friday in search of super-safe government debt at the end of the quarter, central bank data show.

Demand for the overnight repo program, which is for short-term investments formally known as repurchase agreements, has grown since the middle of September but become more elevated than usual because of sweeping changes affecting U.S. money markets.

Friday's tally is the second highest daily volume in the facility, known as the overnight RRP, since the Federal Reserve Bank of New York began testing it in 2013. The record was set Dec. 31, 2015, after the central bank lifted interest rates, at $474.6 billion.

Behind the current surge are two main factors, traders said. First, investments into the New York Fed repo facility have spiked around the end of quarters for more than a year, and this quarter has seen funding conditions that are similarly tight. That's because certain banks pull out of the repo market at quarter's end to make their balance sheets appear safer ahead of various regulatory reporting deadlines. Instead, they put their money in the super-safe Fed facility, and earn interest.

The second key driver is that money-market funds are preparing to meet new regulations by Oct. 14, with many of them preferring to convert to holding government-only securities instead of corporate debt. That's sending a majority of funds in search of U.S. Treasurys, which they receive as collateral overnight for investing in the Fed's RRP. Often in the open market, the shortest Treasury debt, or bills, earns them a lower interest rate than the 0.25% they get in the RRP.

Combined, the result of these factors is that more dollars are flowing into the New York Fed repo program and less cash is available to finance securities portfolios across Wall Street. That in turn is sending borrowing costs higher for broker dealers, and indirectly for leveraged investors like hedge funds. On Friday, overnight repo loans backed by Treasurys cost around 0.90%, according to J.P. Morgan Chase & Co., roughly double what they were earlier in the month.

Write to Katy Burne at katy.burne@wsj.com

(END) Dow Jones Newswires

September 30, 2016 14:35 ET (18:35 GMT)

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