Fed's overnight reverse repo hits another record

After more than a year of flooding, the oversupply in the U.S. money market has made the amount of funds deposited by investors in a major tool of the Fed hit a new high.

Data released by the New York Fed showed that 82 participants put a total of $1.19 trillion in the Fed's overnight reverse repo on Tuesday, surpassing the previous record high of $1.147 trillion set on August 25.

The tool is expected to be used less as we enter a new month on Wednesday. However, the demand will eventually rise as the flood of money shows little sign of slow down. Ongoing asset purchases by the Federal Reserve and shrinking Treasury cash balances are pushing more reserves into the financial system, leading more liquidity.

Usage of the tool "is likely to go higher," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale, driven by "a reduction in the supply of short-term debt, a cash glut from rising reserves, and inflows to ultra-short-term bond funds." It remains unclear at what level demand for the tool will peak. Rajappa said that will depend on how long the U.S. government takes to resolve the debt ceiling.