Liquidity lowdown: The recent spike in repo yields

For several months, the sterling repo market has remained relatively stable. Overnight SONIA, the rate at which financial institutions lend cash overnight, has remained around three to four points below the bank rate (currently 4.00%) since the start of the year.

However, during the final week of October 2025, repo rates experienced a temporary spike, pushing the cost of borrowing cash in money markets to the highest level since 2020.

Such spikes and volatility are rare in a market that is generally stable, but it highlights ongoing efforts by the Bank of England (BoE) to drain liquidity from the front end of funding markets as part of its quantitative tightening programme. This reversal of multi-year bond purchases following the financial crisis – originally aimed at stabilising the economy – coincided with additional idiosyncratic factors that have caused repo rates to surge and therefore add to the strain in front-end liquidity.

In the final week of October, a record volume of Term Funding Scheme loans were repaid, leaving banks and building societies with additional demand for short term funding.

In March 2020, the Term Funding Scheme with additional incentives for small to mid-size enterprises (TFSME) was introduced to encourage banks and building societies to continue lending to consumers and businesses throughout the Covid pandemic. Designed as a source of low-cost funding to stimulate the economy, it offered participants interest rates at or slightly below bank rate. In the final week of October 2025, a record volume of these loans were repaid, leaving banks and building societies with additional demand for short term funding.

Money market funds (MMFs) lend cash to banks on an overnight basis to manage and maintain their daily liquidity requirements in accordance with money market regulations. MMFs can usually lend overnight cash for around SONIA plus three to four basis points, or bank rate, but have been offered levels around ten basis points higher in the last week of October 2025. This may ultimately have a positive impact on the end investor as the overall yield on MMFs could see a small increase, albeit temporary, over the week, depending on the proportion of the MMF which is held in overnight repos. 

Although MMFs are now providing banks with more cash than ever, their lending still falls short of meeting overall demand. Consequently, alongside borrowing from MMFs, banks can also turn to various BoE facilities to secure short-term funding. The short-term repo facility saw record usage at the end of October, with banks borrowing almost £100 billion in one-week funding. This is not necessarily a sign of persistent tension in the market, as the facility’s purpose is to mitigate this, but a sign that liquidity diminished more than usual during the final week of October, and that banks needed to utilise such tools to ensure they could access the funding they require.

Repo rates have since returned to normal stabilised levels, and the latest spike was merely a temporary event.  There are no fundamental flaws in the market now that this latest pressure has subsided. The short-term repo facility offered by the BoE is designed to keep overnight lending levels close to bank rate and has so far been doing just that. By enabling banks to access the funding they require, the pressures caused by liquidity shortages can be effectively contained.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.

The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.