Extremely low short-term interest rates in the US are sharply eroding the functioning of the government repurchase or repo market, a foundation stone for the financial system and trading Treasury debt.

While the Federal Reserve reduced its benchmark interest rate from 1 per cent to a new range of zero to 0.25 per cent on Tuesday, short-term market rates have been trading at close to zero per cent in recent weeks. Driven by a flight to safety by investors and expectations of rate cuts, such conditions are creating problems in the repo market, where investors borrow Treasuries in return for short-term cash loans.