In the paper "Interest Rate Parity, Money Market Basis Swaps, and Cross-Currency Basis Swaps" by Bruce Tuckman and Pedro Porfirio (2003) the authors claim that cross-currency basis swap exchanging default-free overnight rates should trade flat. To be more precise:
To understand why 3-month CDOR plus 10 is fair against 3-month USD LIBOR, it is best to begin by considering an imaginary cross-currency basis swap exchanging a default-free, overnight CAD rate for a default-free, overnight USD rate. Under relatively mild assumptions, Appendix 2 proves that this cross-currency basis swap should trade flat. Intuitively, paying 1 CAD today, receiving the default-free CAD rate on 1 CAD, and receiving 1 CAD at expiration is worth 1 CAD today. Similarly, receiving .677 USD, paying the default-free USD rate on .677 dollars, and paying .677 USD at expiration is worth .677 dollars today. Therefore, because the exchange rate is .677 USD per CAD, the exchange of these floating rate notes is fair today.
But now post Libor reform actual risk free rates such as ESTR and SOFR exist and CBS exchanging the two is not traded flat. For example 5Y CBS ESTR vs SOFR currently trades at around -17.00 bps MID (Reuters ticker EUUSESSRBS=). Why is that? Are the authors or the market wrong?