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Will the plunge in U.S. Treasury bonds cause USDC/USDT to explode?

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The Fed’s interest rate hike has caused a drop in the price of U.S. Treasury bonds. There are a large number of U.S. Treasury bonds in the USDT and USDC reserves. Will this lead to a decline in the book value of the reserve funds and make it impossible to fully redeem them?

Original author: CapitalismLab

Will the plunge in US Treasury bonds cause USDC/USDT to explode? Due to the recent spread of pessimism in the market, coupled with the Fed's interest rate hike, which has led to a drop in US Treasury prices, many friends have begun to ask this question. It happens that I have some experience in bonds, so I wrote this thread to explain this:

The source of the problem is that some people suspect that after the US Treasury price falls, the book value of US Treasury bonds in Circle's hands will naturally decrease, resulting in the possibility of not being able to redeem in full, which sounds like the case. Considering that everyone is not so familiar with the price and interest of bonds, I will first give you an example to supplement the basic knowledge of bonds.

For example, suppose you buy a 10-year US bond with a face value of $100 in 20 years, and pay 1% interest every year. However, due to the interest rate hike, the market is only willing to buy 8-year (10-2) US bonds at an interest rate of 4% in 22 years. However, the US Treasury will not actively pay more interest on ordinary bonds that have been issued, so the only way to achieve this goal is to reduce the price of your bonds and widen the spread. 100*1.01^8=x*1.04^8, x= $79, a 21% plunge!

"For ease of understanding, the above calculation is actually simplified." Now, those who buy this bond at $79 can get $100 principal plus $1 interest every year in 8 years, and the comprehensive interest rate is 4% "Again, the calculation is simplified." This is the basic principle of why interest rate hikes cause bond prices to fall.

Does it sound scary? But don’t panic, let’s reduce the remaining time to 1 month and see what happens 100*1.01^（1/12）=x*1.04^（1/12）x=$99.8, which will only drop by 0.2%! Also remember that you can get back the principal of the face value when the bond matures, so as long as the term of the purchased bond is short enough, the risk is very low.

Let’s take a look at Circle’s latest report. The reserves are almost all US Treasury bonds and cash, among which US Treasury bonds show an average weighted term of 27.8 days. In addition, Circle itself has a certain amount of capital, and the current scale of USDC is relatively small compared to the overall scale of US Treasury bonds. I believe that even facing 100% short-term redemption is bearable. (Note that the above assumptions are based on the fact that the audit report is true)

In comparison, USDT's reserves are more complicated, but U.S. Treasuries still account for the majority, with an average maturity of less than 45 days, and a stronger ability to cope with risks.

In summary, USDC/USDT reserves hold short-term U.S. Treasuries, whose prices are less affected by interest rate hikes, so the impact of falling U.S. Treasuries prices is relatively controllable.