While investors expected the Federal Reserve to reduce its benchmark interest rate by half a percentage point to 0.50 per cent points yesterday, short-term market rates have been trading at close to zero per cent in recent weeks.

Driven by a flight to safety by investors and expectations of rate cuts, such conditions are creating problems in the repo market, where investors borrow Treasuries in return for short-term cash loans. This activity allows traders to sell Treasuries without owning them in the first place, while owners of government debt can fund their portfolios by lending Treasuries.

When rates tumble to low levels, it reduces the economic incentive to lend securities. The reduction in liquidity in the $5,800bn Treasury market comes at a time when conditions have become strained as the calendar year draws to a close.