You are reading an excerpt from our free but shortened abridged report! While still packed with incredible research and data, for just $40/month you can upgrade to our FULL library of 60+ reports (including this one) and complete industry-leading analysis on the top crypto assets.
Becoming a Premium member means enjoying all the perks of a Basic membership PLUS:
- Full-length CORE Reports: More technical, in-depth research, actionable insights, and potential market alpha for serious crypto users
- Early access to future CORE ratings: Being early is sometimes just as important as being right!
- Premium Member CORE+ Reports: Coverage on the top issues pertaining to crypto users like bridge security, layer two solutions, DeFi plays, and more
- CORE report Audio playback: Don’t want to read? No problem! Listen on the go.
Intro
The Treasury market encompasses the global trading of U.S. government debt securities, commonly referred to as Treasuries. These securities are issued by the U.S. Department of the Treasury to finance federal government operations and budget deficits. Recognized as one of the largest and most liquid financial markets worldwide, the Treasury market attracts a diverse range of investors, including individual retail investors, central banks, financial institutions, and large institutional investors.
Types of Treasury Securities
There are four primary types of Treasury securities:
-
Treasury Bills (T-Bills): These are short-term debt securities with maturities ranging from a few days to 52 weeks. Issued at a discount to their face value, T-Bills do not pay interest in the form of coupons. Instead, investors earn returns through the difference between the purchase price and the face value at maturity.
-
Treasury Notes (T-Notes): These medium-term debt securities have maturities of 2, 3, 5, 7, and 10 years. T-Notes pay semi-annual interest, known as coupon payments, and return the face value at maturity.
-
Treasury Bonds: Long-term debt securities with maturities of 20 or 30 years. Similar to T-Notes, Treasury Bonds provide semi-annual interest payments and repay the face value at maturity.
-
Treasury Inflation-Protected Securities (TIPS): These are inflation-indexed securities with maturities of 5, 10, and 30 years. TIPS adjust both the principal value and interest payments based on changes in the Consumer Price Index for All Urban Consumers (CPI-U). However, TIPS will be omitted from this analysis.
Significance of the Treasury Market
The Treasury market is vital to the global financial system, as Treasury securities are regarded as safe-haven assets due to the perceived low credit risk of the U.S. government. The prices and yields of Treasury securities serve as benchmarks for interest rates across various markets, influencing the overall economy, monetary policy, and investor sentiment.
The U.S. government is perceived as the strongest and lowest-risk USD creditor, owing to its full control over fiscal and monetary policy. While the Federal Reserve operates independently from the U.S. Treasury, aligned interests in economic stability have historically shown that the Federal Reserve would support the Treasury market with new base money before any traditional defaults. The most likely route to default would stem from internal U.S. government dysfunction, such as failure to raise the debt ceiling. This issue came to the forefront in 2023 when the debt ceiling was reached on January 19th, with effects delayed through extraordinary measures until at least June 5th and subsequently extended.
Issuance and Trading of Treasury Securities
The U.S. Department of the Treasury issues securities via regular auctions. T-Bills are issued weekly, typically in volumes exceeding $250 billion, while T-Notes are issued monthly, around $200 billion. Investors can participate directly in these auctions or trade Treasury securities in the secondary market through brokers, dealers, and trading platforms. Treasuries are highly liquid, with daily trading volumes often surpassing $50 billion for those with less than a 2-year maturity.
Treasuries are categorized into two groups:
-
On-the-Run Treasuries: These are the most recent U.S. Treasury issues for each maturity and serve as benchmarks for pricing and trading fixed-income securities due to their high liquidity and significant investor demand.
-
Off-the-Run Treasuries: These are older issues that have been replaced by newer on-the-run issues. They typically have lower trading volumes and less liquidity.
Implications of Treasury Categorization
The categorization of Treasuries has several implications:
-
On-the-Run Treasuries: Due to their higher liquidity, these securities typically command higher prices and yield lower returns.
-
Off-the-Run Treasuries: With lower liquidity, these securities generally trade at a discount and offer higher yields to compensate investors for the reduced liquidity.
The yield difference between on-the-run and off-the-run Treasuries, known as the "liquidity premium," acts as an indicator of market liquidity and investor sentiment. This premium reflects the varying demand and liquidity levels of these securities, providing insights into the broader financial market conditions.
USDC Case Study
USDC is an asset-backed stablecoin, meaning it is fully collateralized by corresponding US dollar reserves held in regulated financial institutions. Each USDC token represents a claim on one US dollar. The reserve is audited regularly by independent accounting firms, ensuring transparency and trust in the stablecoin's value. USDC is supported by a network of licensed and regulated banking partners that hold the US dollar reserves. These banks provide essential services, such as custody and transfer of funds. Key banking partners for USDC include Silvergate Bank, J.P. Morgan, and Signature Bank.
Source: CoinGecko
Reserve Composition
At the core of the USDC reserve structure, we find the undeniable foundation of U.S. Treasury Bills. Approximately 80% of USDC's backing consists of these financial instruments, specifically 3-month U.S. Treasuries. Renowned for their price stability and liquidity, these assets are among the most reliable in the world.
The Circle Reserve Fund is managed by BlackRock, the world's largest asset manager. The Bank of New York Mellon oversees its custodianship. Utilizing these very established and respected companies helps bolster Circle and USDC’s reputation among U.S. regulators.
In the quest for a balanced portfolio, around 20% of USDC's reserves are held in cash. This is not concentrated in one location but rather dispersed among eight U.S.-regulated banking partners. This strategy of diversification underscores the importance of risk management in the crypto sector.
The USDC reserves are isolated from Circle's operations and held in segregated accounts exclusively for the benefit of USDC holders. This separation adds an extra layer of protection for stakeholders, reinforcing the trust in the system.
Furthermore, these reserves are classified as 'bankruptcy remote,' meaning that in the unlikely event of a Circle bankruptcy, they are protected by U.S. laws and would not be part of the creditors' estate. This measure ensures that the value of USDC remains unaffected, further reinforcing the token's stability and reliability in the face of potential adverse conditions.
