But so far, although the largest stablecoin, Tether, has fallen below par, it does not seem to have caused much spillover. Tether is used to facilitate transactions in the cryptocurrency market. The crypto asset also fell sharply after another stablecoin, TerraUSD, crashed.
Some very short-term Treasury bills are clearly misplaced, possibly related to stablecoins, and the yields of some securities do not match the overall curve fluctuations, but other than the overall impact of the recent collapse in crypto assets on the global risk market, there is no indication of widespread Spillover Effect.
Barclays strategist Joseph Abate believes that only Tether’s redemption scale of more than half of its total holdings is likely to cause significant pressure in traditional currency markets.
One reason is that U.S. Treasuries are likely to be the bulk of the initial liquidation process, and there is already a supply-demand balance in these markets where excess assets should be absorbed relatively easily. He believes that a real impact will only be possible when redemptions begin to affect Tether’s commercial paper holdings and certificates of deposit.
“Tether may be forced to fire off holdings to meet redemption requirements,” Abate wrote in a note Thursday. “Money market investors are nervous that if Tether is forced to sell commercial paper or certificates of deposit, these typically illiquid markets could freeze as they did in March 2020.”
While Tether fell below par, Abate believes it is “probably premature in some way” to worry about money market assets.
“If Tether needs to sell notes, there is demand,” Abate told clients on Thursday. “Only when Tether redemption ratio exceeds 50% will the traditional money market likely start to come under pressure, which may be limited to the small market of lower tier commercial paper.”
