In a recent talk, Jeff Snider of Eurodollar University explained that banks are now using the Fed’s new Bank Term Funding Program to arbitrage between that interest rate and IOER. IOER (now the same as IORB) as of the 8th of January 2023 is 5.4%, and along with RRP is designed to put a floor on interest rates to try and stop T-Bill rates falling below Fed Funds. The BTFP is at 4.94% and is based off the one-year overnight index swap rate plus 10 basis points. This means that banks can offer securities to the BTFP, paying 4.94%, and keep in reserves at the Fed to earn 5.4%.
The BTFP was set up to relieve stress in the banking system from banks that had purchased long-duration securities at low interest rates but were now having to pay higher interest rates from a rapid increase in the Fed Funds rate. Arguably, it is too low if it has created a risk-free arbitrage all funded by the Fed.
Snider goes on to say that this arbitrage is very small, and maybe the bigger economic question is asking why banks are choosing to use their balance sheet and securities to engage in a relatively small arbitrage opportunity rather than create credit in engaging in the real economy.