As the issuance of dollar stablecoins increases, interest costs decrease as the interest rates of U.S. short-term government bonds fall, while existing U.S. government bond prices rise (yields decline), according to recent research. There is growing interest in whether stablecoins can replace the demand for short-term U.S. government bonds.
According to a report released in May by the German nonprofit organization Blockchain Research Lab on the 9th, each time the stablecoin Tether (USDT) increases its market share in U.S. government bonds by 1 percentage point, the yield on 1-month U.S. government bonds is analyzed to decrease by 3.8%. Considering that the average yield on 1-month U.S. government bonds in the first quarter this year was 4.16%, this implies a decline in yield of up to 0.15 percentage points. Consequently, the U.S. is expected to save between $1.3 billion and $1.5 billion in government bond interest costs.
As the issuance of stablecoins increases, the demand for U.S. government bonds rises. This is because issuers invest 70-80% of the dollars they receive in exchange for issuing coins into U.S. government bonds with maturities of less than one year. If the demand for U.S. government bonds increases, the U.S. can issue bonds at relatively low interest rates, thus reducing interest costs. Conversely, the prices of U.S. government bonds already issued at high interest rates increase, leading to lower yields.
In particular, as Tether's market share exceeded 0.973%, it is estimated that each 1 percentage point increase in market share results in a 0.0626% decrease in the yields of U.S. government bonds maturing in one month. On the other hand, if the share is below 0.973%, the yield on U.S. government bonds decreases by 0.0173%. This indicates that if Tether holds a certain percentage of U.S. government bonds, its influence on the U.S. government bond market increases in a stepwise manner. The current market share of dollar stablecoins in short-term U.S. government bonds is estimated to be around 2%. This is why forecasts indicate that as demand increases, it will have a significant impact on the market, such as lowering interest rates.
Professor Kim Sang-rae from Kyunghee University noted in a paper published last month on the macroeconomic impact of stablecoin demand for government bonds that the yield of the exchange-traded fund (BIL) investing in short-term U.S. government bonds averaged 0.027% higher the day after USDT was issued on a large scale. This indicates that prices of existing short-term U.S. government bonds rose due to the large-scale issuance of stablecoins. Professor Kim stated that this is a temporary phenomenon, but predicted that as the stablecoin market grows, its ripple effect on the U.S. government bond market may expand.
The market cites the increase in demand for U.S. government bonds as one reason why the U.S. is seeking to activate stablecoins. Demand for U.S. government bonds is centered around institutions such as central banks and pension funds of various countries, including the U.S. If stablecoins are activated, ordinary citizens in each country will form a part of the demand for short-term U.S. government bonds. This is why expectations are rising that stablecoins will play a major role in the U.S. government bond market, beyond just payment and settlement innovations.
According to Reuters, Mark Cabana, who is responsible for U.S. interest rate strategy at Bank of America, said at a money market fund conference in Boston last month, "If the U.S. intends to shift to a policy of issuing short-term government bonds, one justified rationale for this would be the massive demand coming from stablecoins."