Banks Take Advantage of a Free Money Arbitrage Opportunity Offered by the Fed

 Lesson of the Day: Banks do not turn down free money.

The Fed created a Bank Term Funding Program (BTFP) to bail out banks that foolishly levered into long-term interest rate bets that went sour.

The BTFP program allows banks to swap underwater US treasuries with the Fed at par value, effectively bailing out the speculators.

BTFP use soared along with bets that the Fed will soon cut rates.

Gaming the System

The Wall Street Journal reports The Fed Launched a Bank Rescue Program Last Year. Now, Banks Are Gaming It.

Borrowing from the Fed’s bank term funding program has increased to new highs in recent weeks, a strange consequence of the market’s flip to forecasting multiple Fed rate cuts over the coming 12 months.

The rate banks pay to use the program, BTFP for short, is tied to future interest-rate expectations. Now that investors have priced in a series of rate cuts later this year, banks are able to pocket the difference between what they pay to borrow the funds and what they can earn from parking the funds at the central bank as overnight deposits.

The facility charges banks a rate equivalent to the market’s expectation for where benchmark interest rates average over the next year, plus an additional 0.1 percentage point. Initially, borrowing was expensive because investors were pricing in higher rates in the future.

A dramatic reversal in rate expectations in recent months has changed the math.

The program is set to expire on March 11, barring an extension. On Tuesday, Michael Barr, the Fed’s vice chairman for banking supervision, suggested the facility wouldn’t be extended.

Free Money, Not Stress

Some analysts thought the increase in BTFP was related to additional stress on regional banks.

But that’s not what’s going on. Rather, banks see a chance for free money and are taking it.

Meanwhile please note Debt Jumps Past $34 Trillion, $1 Trillion Interest

The fallback position is not less of anything. Rather, it’s another clean continuing resolution.

A bipartisan majority wants more of this and more of that. So that is what you should expect.

The Fed wants to get interest rates down to curtail interest on debt rising above $1 trillion.

But deficits and debt are soaring.

Spending Deal Reached

Note that A Spending Deal Reached, But the Republican Freedom Caucus Condemns It

The deal does not address the border at all.

To get any border funding (that Biden will try to find a way to not honor), Republicans will have to further cave in on both Ukraine and Israel.

The total funding will be well in excess of the deal that Kevin McCarthy once had on the table.

https://mishtalk.com/economics/banks-take-advantage-of-a-free-money-arbitrage-opportunity-offered-by-the-fed/