Borrowing rates skyrocketed on Tuesday in a corner of the markets the public rarely notices but that is critical to the functioning of the global financial system.
The spike in overnight borrowing rates forced the New York Federal Reserve to come to the rescue with a special operation aimed at easing stress in financial markets.
It was the NY Fed's first such rescue operation in a decade, the last occurring in late 2008.
"It's unprecedented, at least in the post-crisis era," said Mark Cabana, rates strategist at Bank of America Merrill Lynch.
On Tuesday morning, the NY Fed launched what's called an "overnight repo operation," during which the central bank attempts to ease pressure in markets by purchasing Treasuries and other securities. The goal is to pump money into the system to keep borrowing costs from creeping above the Fed's target range .
The first attempt by the NY Fed was canceled because of "technical difficulties."
Minutes later, the NY Fed successfully injected $53 billion into the system.
The episode demonstrates evidence of emerging strains in financial markets and raises concern that the Federal Reserve could be losing its grip on short-term rates.
"The funding markets are clearly stressed," said Guy LeBas, managing director of fixed income strategy at Janney Capital Markets. "It's going to require Fed action."
The NY Fed announced plans late Tuesday to hold another repurchase agreement operation on Wednesday that would aim to repurchase up to an additional $75 billion.
The rate on overnight repurchase agreements hit 5% on Monday, according to Refinitiv data. That's up from 2.29% late last week and well above the target range set in July by the Federal Reserve, which is 2% to 2.25%. The surge continued Tuesday, with the overnight rate hitting a high of 10% before the NY Fed stepped in.
Although it doesn't get as much attention as the Dow or the 10-year Treasury rate, this overnight market plays a central role in modern finance. It allows banks to quickly and cheaply borrow money, for short periods of time, often to buy bonds like Treasuries. This market broke down during the 2008 financial crisis.
However, analysts drew a distinction between the current period of stress and what happened during the crisis. Back then, investors were deeply worried about the financial health of banks. Today, banks are hauling in record profits and balance sheets look sturdy.
It's unclear what exactly is causing the stress in the overnight market, or how long it will last.
"No one knows why this is happening," Jim Bianco CEO of Bianco Research, said on Twitter. "If it persists more than another day or two, it will be a problem."
If this all is starting to smell like we're back in 2007, heading for disaster in 2008, there are now a lot of similarities, too many in fact to ignore. And Donald Trump is in charge of fixing this. I'll tell you what happened, the markets honestly think Trump is going to bomb Iran and send us all to hell.
Stay tuned. It's only going to get worse from here. Much worse.