(Bloomberg) -- An indicator of potential funding strains tied to the Federal Reserve’s balance-sheet unwind is flashing an early warning.

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The level of daylight overdrafts — when a bank withdraws more money than it has in its account at the Fed — spiked earlier this year, according to the latest data released by the central bank. That’s a signal of concern to some on Wall Street as it reflects a similar, though less-extreme, pattern to when instability hit US funding markets in September 2019.

“The level of daylight overdrafts at the Fed was an important early warning sign of potential liquidity strains in the run-up to the September 2019 repo squeeze,” Wrightson ICAP economist Lou Crandall wrote in a note. “In light of that history, we were slightly disconcerted” by recently issued data for the first quarter.

Although the data for the first two-week reserve reporting period in January was in line with the pattern seen the past couple of years, the subsequent five two-week periods “exhibited a pattern that was surprisingly reminiscent of the 2019 spike in daylight overdrafts,” Crandall said.

In the two periods ending in February, overdrafts rose to an average of $6.6 billion before spiking temporarily to $11.9 billion in the week ending March 6, the highest in four years, according to Fed data.

In September 2019, an increase in government borrowing and a corporate tax payment created a shortage of reserves. That resulted in a five-fold surge in a key lending rate and a spike in the federal funds rate above the target range, forcing the Fed to intervene to stabilize the market.

The New York Fed’s Roberto Perli, who oversees the central bank’s portfolio of assets, in May laid out the metrics that officials are watching to determine the point at which bank reserves start to become scarce — and the Fed’s balance-sheet unwind, known as quantitative tightening, likely has to stop. Those indicators included the federal funds rate and balances at the reverse repo facility, domestic institutions’ borrowing in the fed funds market, the share of outgoing interbank payments after 5 p.m. New York time and intraday overdrafts by banks.

While recent moves in the repo market are reminiscent of tumult seen late last year, they’re far from the 2019 extremes. Yet other hints, which warned of strains in 2018 to 2019, have started to re-appear. Dealer holdings of Treasuries are near all-time highs, and overnight repo rates continue to creep up. As a result, it has taken overnight rates and by extension SOFR, which is calculated from repo data, longer to normalize after auction settlement days.

While Crandall said the firm is treating the March 6 spike in daylight overdrafts as an aberration given that the aggregate level of reserves was roughly $3.6 trillion at that time, it still merits watching.

“Overdraft trends are likely to be a useful gauge of evolving liquidity conditions over the coming quarters,” he wrote. “We’ll interpret the series more cautiously in light of the anomalous Q1 data.”

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