It is possible that Tether holds funds in some kind of strange non-interest-bearing account, but that seems highly unlikely. Another possibility is that the primary bank is actually a wrapper around some overseas correspondent bank where the funds are really held.
Occam's razor: a company selling a 1:1 hedged coin should have absolutely no difficulty whatsoever proving on a daily or hourly basis that all coins are verifiably fully hedged. It should literally be the company's prime directive, and in this particular case, especially following the endless stream of controversy. The fact they haven't managed to convincingly achieve this even once in 7 years is all I need to know.
The whole thing stinks terribly. Good luck for those who invest in it, but I'll be there if/when it blows up to quietly feel smug about it all