Rates for repurchase agreements, Treasury bills and other short-term dollar borrowing instruments have been driven to zero and below, weighed down by Federal Reserve asset purchases, a shift from bank deposits to money-market funds, and an increase in bank reserves that’s being fueled by a drawdown of the U.S. Treasury’s mammoth cash pile. That in turn is helping weigh on Libor.

While there’s more cash in the system, demand to borrow from commercial-paper markets has also collapsed, which has facilitated the decline. March saw a puzzling surge in three-month AA financial commercial paper issuance, with one day seeing the largest sales since 2014. Libor held steady through March, but has steadily declined in April as supply has collapsed.

“This lack of commercial paper has certainly contributed to the decline in Libor/OIS,” Morgan Stanley strategists including Kelcie Gerson wrote in a client note. The spread fell to around 8.5 basis points on Wednesday.

Despite the Libor/OIS spread being at the tightest level since 2010, the move could still have further to go, according to NatWest Markets.

The spread between three-month Libor and T-bills is at 15.7 basis points, which is “relatively high” in the range of the past year, and can tighten to the November lows of around 12 basis points, NatWest’s head of U.S. rates strategy Blake Gwinn wrote in a client note.

The drop in Libor prompted a flurry of activity across June 2021 eurodollar futures, with immediate buying of 20,000 contracts after the fix. The contract closed at 99.815, implying a three-month fix at 0.185% — around one basis point higher than the current level.