The cost to borrow in the overnight repo market fell below the US federal funds target range on Tuesday on strong demand for Treasuries to rebalance portfolios at year-end, with the Federal Reserve seeing the largest take-up for its reverse repo operation in a year and a half.

The Fed accepted $64 billion in its reverse repo operation on Tuesday at a rate of 1.45%, the highest take-up since June 29 2018. In such operations market participants lend money to the Fed in exchange for Treasury collateral. The cost to borrow overnight in repurchase agreements backed by Treasuries fell to 1.40%, below the Fed's target range for the fed funds rate of 1.50% to 1.75%. It is the lowest since March 2018.

Tom Simons, a money market economist at Jefferies in New York, noted that the repo rate can fall at month-, quarter- and year-ends when demand for collateral is high.

It comes after the Fed averted a funding squeeze for year-end by flooding the repo market with liquidity, lending money to banks in exchange for Treasuries. Banks took only a small portion of the Fed's $150 billion on offer in its last overnight repo operation of 2019. The Fed has thrown $255.6 billion into the funding market through early January to ensure the financial system operates smoothly over the choppy year-end period. It will continue pumping tens of billions a day into the repo market through the end of January at least, including up to another $185 billion in one-day and term deals on Thursday, when the market kicks off the new year.