Cash Is Flooding Into Short-Term Markets Like Never Before. Is That a Bad Sign?

An unusual surge of short-term lending by cash-rich companies is raising concerns on Wall Street that a period of unrest may lie ahead.

Investors such as money-market funds and banks are parking over $1 trillion in spare cash overnight at the Federal Reserve. That is the most on record since the Fed opened its facility for these reverse repurchase agreements in 2013.

The scale of the moves has some analysts warning that the markets for short-term funding are vulnerable to disruption. The cause for this summer’s rush into the Fed’s reverse repo facility appears to be the central bank’s decision in June to nudge up the amount of interest it pays, from 0% to 0.05%—though usage had already been rising in the spring.

Repurchase agreements, or repos, are the market’s main mechanism for moving cash from those who have it to those who need it. The Fed also uses them to influence short-term interest rates; the flood into reverse repo means banks and investors have extra cash and the Fed is vacuuming it up.

A higher interest rate should attract more money, but analysts said they were surprised by the speed with which firms moved into reverse repo from other short-term investments such as Treasury bills and commercial paper.