The arbitrage of The Fed's various balance sheet facilities - which we have exposed in detail for weeks - first appeared after The Fed's November 1st meeting made it clear that peak-rates were in (and the Treasury announced a lower than expected refunding plan). That was when the market started to price in lower rates in the year ahead, dragging the one-year overnight index swap rate lower (which The Fed's Bank Term Funding Program - BTFP) is predicated on.
As we explained before, a completely perfect 'free money' arbitrage was available to those banks who could lodge collateral with The Fed at its BTFP facility receiving cash at par (at a cost of OIS+10bps) and then post that cash earning Fed Funds rate on it - scooping up the difference.
