Investors flock to Fed rate futures as signs of tightening repo market emerge

Investors are piling into futures tied to the Federal Reserve's benchmark overnight rate at a record pace amid the risk of end-of-quarter tightening in short-term funding markets. Data shows that trading volume in September federal funds futures contracts, used to bet on the direction of the Fed's benchmark overnight rate, has reached nearly 500,000, surpassing the previous all-purpose contract record set on April 3rd, when Trump announced sweeping tariffs, roiling markets. Some market participants worry that dwindling reserves could trigger a surge in funding pressures during the month-end and quarter-end periods, when dealers cut back on repo operations and strengthen their balance sheets to meet regulatory requirements, driving up funding costs. Selling intensified again in early U.S. trading as traders anticipated the effective interest rate could rise to 4.10% by month-end.