Major banks and investment houses rely on the money markets — a key cash source for financial markets— to finance trading positions and loans they make. Companies sell commercial paper and other short-term debt to money market funds and other investors to fund their inventories and payrolls.

The massive storm, Sandy, disrupted these markets, thinned trading and drove up borrowing costs on Monday and Tuesday, although analysts expect money market rates to return to normal levels by early next week.

"It showed a bit of stress that everyone was trying to fund themselves," said Mike Lin, director of U.S. funding with TD Securities in New York.

Some companies were heard withdrawing heavily from their accounts with money market funds last Thursday and Friday in preparation for possible market disruptions this week, analysts said, although the latest data available showed money fund assets had risen through Oct 24.

If banks were to struggle to obtain short-term funding, they could turn to the U.S. Federal Reserve, but there were no signs any banks needed to borrow emergency cash via the central bank's "discount window," analysts and traders said.

The Fed currently charges 0.75 percent at its discount window on loans to creditworthy banks.

A spokesman with the New York Fed, which oversees open market operations for the central bank, declined to comment.

MONTH-END COMPLICATION

But overnight borrowing costs in funding markets have since receded from levels seen on Monday and Tuesday, which were levels not seen since the height of the global credit crunch in late 2008.

"It was about the market being illiquid. People tried to close their books before the storm," Alex Roever, short-term interest rate strategist at J.P. Morgan Securities who is based in New York, said about the trading on Monday and Tuesday.

Investors charged a borrower 0.35 to 0.40 percent for an overnight loan in the repurchase agreement (repo) market on Wednesday. This was double what they charged last week, analysts and traders said.

However, this was sharply lower than the 1.25 percent heard quoted late on Monday before Sandy made landfall in the U.S. Northeast. The storm knocked out power for about 8 million people and flooded the New York subways.

Money market funds and other large investors also commanded slightly higher compensation to buy commercial paper (CP).

The trading volume of these short-term corporate IOUs was a quarter of their average daily volume, traders said.

"The challenge was on the investor side. They were trying to figure what their month-end outflows were," J.P. Morgan's Roever said.

Interest rates on commercial paper that matures in a week on average was quoted at 0.25 percent, fractionally higher than last Friday. CP activity was non-existent on Monday and Tuesday, according to market participants.

The timing of the interruption also complicated the jobs for money market traders who typically seek cash to settle trades and exit positions on the last trading day of the month.

Traders at banks and other institutions rushed to raise money Monday and Tuesday to insure their trades were funded at least through Wednesday, when they had expected the stock and bond markets to reopen.

"It's not as bad as it could have been, but people are still operating with skeletal staffs," TD's Lin said.

The staffing at banks and Wall Street firms should improve as the city's subway system resumes limited service on Thursday.

On Friday, the overnight repo rate ended at 0.20 percent.

In the $1.8 trillion tri-party repo market, a borrower obtains cash from investors by pledging Treasuries and other securities as collateral.

Longer-term repo rates were lower on expectations of trading returning to normal soon, analysts said.

"By next week, we should be back to normal ranges," said Dave Sylvester, head of money markets with Wells Capital Management in Minneapolis.

Well Capital operates a dozen money market funds with combined assets of $130 billion.

One-week repo rates, for example, was last quoted at 0.20-0.25 percent, while one-week CP rates were quoted in a similar range.