U.S. Treasuries face stablecoin-driven demand surge as supply looms

Globe and Mail

10 hours ago

The potential for stablecoins to fuel demand for short-term U.S. Treasury securities was a hot topic at a money market fund conference in Boston this week, with investors expecting these digital tokens to absorb a huge supply of government debt later this year.
Stablecoins are pegged to highly liquid assets such as the U.S. dollar and the tokens can drive demand for U.S. Treasuries by requiring issuers to hold large, liquid, and safe reserves to support a 1:1 peg to the greenback.
'Stablecoins are drawing significant...demand for the Treasury market,' said Yie-Hsin Hung, CEO of State Street Global Advisors, in keynote remarks at the Money Fund Symposium on Monday.
She said about 80 per cent of the stablecoin market is invested in either Treasury bills, known as T-bills, or repos, which are repurchase agreements. That represents about US$200-billion, roughly less than 2 per cent of the overall Treasury market.
'But stablecoins are growing fast, and most likely, will outpace the growth of Treasury supply,' Ms. Hung said.
As more financial institutions and corporations adopt stablecoin for payments, remittances, or decentralized finance applications, issuers need to hold more reserves to back the growing supply.
For instance, if the market capitalization of USDC, a stablecoin issued by Circle, increases by US$10-billion, the issuer might purchase US$10-billion in Treasuries to maintain the peg.
Circle, a payments technology company, and Tether, a blockchain-enabled platform, are the two largest stablecoin issuers.
Given expectations of looming Treasury supply of as much as US$1-trillion by the end of the year, the market is looking for an incremental buyer that would be a source of new demand for U.S. government debt. Stablecoin issuers fit the bill, market participants said.
'If they do indeed squeeze this supply balloon on Treasuries and rely on the front end of the curve for debt issuance, we think that one of the justifications...is that all this demand that's coming from stablecoins...gives (U.S. Treasury Secretary Scott) Bessent cover in order to make that shift to the shorter end,' said Mark Cabana, head of U.S. rates strategy at BofA Securities, during one of sessions at the symposium.
Mr. Cabana noted that stablecoin issuers tend to buy T-bills and shorter-dated Treasury coupons.
In an emailed statement on Thursday after the story's initial publication on Wednesday, Tether said it already holds over US$120-billion in U.S. Treasuries and continues to act as a significant buyer of short-term government debt. It added that it is already the fifth largest purchaser of U.S. Treasuries.
'While we don't speculate on future Treasury issuance or allocations, we remain committed to maintaining highly liquid, dollar-based reserves,' Tether said.
Circle echoed similar sentiments. The firm noted that the majority of USDC reserves are held in the Circle Reserve Fund, which contains cash, short-dated Treasuries, and overnight repos designed to make USDC redeemable 1:1 for U.S. dollars,' a Circle spokesperson said.
'This full-reserve composition makes Circle a natural buyer of short-dated U.S. Treasuries and lender in the U.S. Treasury repo market, however, market demand for USDC determines the overall size of our reserves.'
Adam Ackermann, head of portfolio management at Paxos, a financial services and technology company, said he has had multiple conversations with the largest banks in the world wanting a stablecoin.
'They're calling us and saying: I need a stablecoin in eight weeks. How can we get one?'
'What's somewhat concerning is we're just at this fever pitch right now,' Mr. Ackermann said. 'It's great for the industry, but we need to start to put some guardrails on things.'
Stablecoins' popularity further ramped up after the U.S. Senate passed last week a landmark bill to create a regulatory framework for the token called the GENIUS Act.
The Republican-controlled House of Representatives still needs to pass its version of the bill before it heads to President Donald Trump's desk for approval, but the bill's passage bolstered hopes of wider adoption of a once-niche part of the crypto sector.
The stablecoin market is worth about US$256-billion, according to crypto data provider CoinMarketCap, and is estimated by Standard Chartered to reach US$2=trillion by 2028 if the legislation is signed by Trump.
'I expect that there will be a proliferation of stablecoins,' Mr. Cabana said. 'It will be an incremental demand source (for Treasuries), I would guess, over the next three to five, certainly 10 years.'
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.