A slightly different point of view is provided by Quentin Vandeweyer, of the U. of Chicago:
There is something odd in today’s money markets. T-bill and repo rates are
negatives and the Fed’s ON repo facility is close to half a
trillion in uptake. Why is that? Because there are not enough T-bills
In this view, the natural way for Money Market Funds (and other non bank investors) to keep large amounts of USD in liquid form is to buy T-bills. But recently the Treasury has cut back on issuing T-bills and increased the issuance of notes and bonds instead.
When the T-bill rate goes negative due to excess demand, MMF turn to bank deposits as a possible alternative. But (here the story coincides with what Liquidity Matters wrote) the banks are not happy to receive all these deposits. Because of more stringent capital regulation, banks do not perform an arbitrage function between different parts of the money markets that they did previously. Since MMF cannot turn to banks for a positive interest rate, they turn instead to the Fed ON RRP facility for a zero rate. This was created by the Fed in 2014 to absorb useless reserves in the banking system.
What I find interesting is that it suggests a very simple solution: the Treasury could issue more T-bills. Alternatively the Fed could issue short term paper ("Fed Bills") to MMF, but apparently that would require congressional approval.
I have only summarized the argument. You van read more from Prof. Vandeweyer himself on Twitter or read his paper which includes an economic model of what goes on: Treasury Debt and The Pricing of Short-Term Assets, December 2019. Link. Interestingly this was written before the current rise in ON RRP.