By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters] – U.S. secured overnight financing rate (SOFR), a Libor substitute preferred by Federal Reserve, remained steady at 0.03% for a second day. It has been stable at 0.05% the last four.

Analysts attribute the sudden decline in Treasuries’ short-term volatility to excess cash received from GSEs (government-sponsored enterprises) and recent volatility in Treasuries.

Current SOFR numbers reflect Wednesday’s rate. Every business day, at 8:01 a.m., the New York Fed releases the SOFR. ET.

Market participants were surprised by the unusual drop in 0.03% that began Tuesday. SOFR stood at 0.05% on Tuesday, June 17. This was just one day after Fed increased the reverse repo and interest rates on excess reserves. The Fed wanted to prevent its overnight benchmark rate falling too low.

The decline in repo rates followed a surge in short-positioning in short-dated Treasuries, analysts said, as expectations grow for an earlier-than-expected Fed rate hike next year. For example, to shorten 2-year notes investors can borrow them from money market funds and then sell them.

The U.S. 2-year Notes became known as “repo specials”, which refer to securities with a high demand on the repo market. Potential buyers are willing to pay low cash to borrow or buy a security.

U.S. 2-year Treasury notes were traded at the highest “special” rate among Treasury securities on Thursday with repo rates for borrowing them at -1.56%. Instead of paying interest to the lender of cash, market participants are willing to pay interest to the 2 year note.

On the 18th day of every month, GSEs such as Fannie Mae are also available Freddie Mac OTC: They receive mortgage payments from homeowners and invest in cash in the repos market. This tends to push repo rates down. They make principal and interest payments by the 24th. This GSE cash is removed from the market pushing repo rates up.

According to Dan Belton of BMO Capital, Chicago fixed income strategist Dan Belton said that the SOFR drop raises questions about stability at the rate which will become the U.S. Dollar benchmark after libor disappears.

“Most investors weren’t convinced of this rate because there was no credit component. It is surprising that the Fed allows it to fall so far within its target range of 3 basis points, which puts the question about how the Fed rates as a benchmark.