Treasury Markets Are Drying Up, But Stablecoin Issuers Say They’re Still Liquid

The allocation of reserves toward short-dated Treasuries has boded well for stablecoin issuers, analyst says

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Though liquidity in the US Treasury market has fallen amid stresses across the banking sector, stablecoin issuers say they are just fine. 

Bid-ask spreads on two-, 10- and 30-year US government bonds jumped to the highest level in at least in six months, Bloomberg reported Tuesday.

A bid-ask spread is the amount by which the ask price exceeds the bid price for an asset in the market, representing the transaction cost.

Data from Quantitative Brokers shows liquidity in the market for 10-year Treasury futures has been less than half the levels recorded before the collapse of Silicon Valley Bank collapse, the Wall Street Journal reported Wednesday. 

But stablecoin issuers are more protected from a decrease of liquidity in Treasury bonds due to their higher allocation of reserves invested in short-dated Treasuries securities, such as Treasury Bills, according to Conor Ryder, research analyst at market data provider Kaiko.

Most top stablecoins work to have an amount of fiat currency or other similarly liquid assets — such as US Treasurys — equal to stablecoins issued. These are generally maintained by third-party partners.

Such entities allocate only a small portion of reserves toward longer-term government bonds, he added.

An accountant report for Circle — published in January by Deloitte — shows the majority of its $32.4 billion bond portfolio is invested in bonds with a maturity date less than three months away, Ryder noted.

Tradfi has been quick to criticize stablecoin issuers in the past, and sometimes rightly so,” he told Blockworks. “But here Circle in particular has shown good liquidity risk management, keeping the majority of reserves in short dated securities that could be sold for minimal loss.” 

A Circle spokesperson did not return a request for comment. 

Meanwhile, a Tether representative said the company holds “a strong, conservative, and liquid portfolio” that includes cash, cash equivalents and US Treasuries with a very short-term duration.

Tether’s stablecoin, USDT, has a market capitalization of roughly $75 billion — behind only bitcoin and ether. 

“We have also developed a set of risk metrics and risk measurement processes, which allows the Tether investment and financial teams to evaluate the risk of the portfolio at any point in time,” the representative added. 

Sebastien Derivaux, MakerDAO’s asset-liability lead, told Blockworks in an email that if there was “a run” on its stablecoin, DAI, it has “ample liquidity in its Peg Stability Module (PSM) — a type of vault that allows users to swap a given collateral type directly for DAI at a fixed rate — to meet initial demand. 

It would then sell its Treasuries to meet redemptions in such a scenario, which he noted would take a few days due to what he called “TradFi slowness.”

MakerDAO is looking to increase its investments in US Treasuries and bonds to $1.25 billion in a proposal made by community member Allan Pedersen earlier this month. 

“The bonds are really short term, so there is no significant price impact due to the fluctuation of rates,” Derivaux said. “In any case, we have a surplus buffer [and] excess capital, covering any shortfall if that should happen during the sales.”


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