US money markets have so far proven resilient amid growing turmoil in so-called stablecoins, although investors remain alert to the risk of problems spilling over into key parts of the world’s financial plumbing.
Some stablecoins are backed by assets like Treasury bills and short-term corporate IOUs -- key elements of the dollar funding markets -- and the concern is that if redemptions are big enough they could spark problems in the markets for these underlying assets.
Yet for now signs of disturbance appear minimal even as Tether -- the largest stablecoin used in cryptocurrency markets to facilitate trading, saw its market value drop below the par level it’s meant to be pegged at. This so-called breaking of the buck followed sharply on the heels of an implosion in TerraUSD -- another stablecoin -- and a rout in cryptocurrency assets.
There has been some apparent dislocation in the pricing of some very short-term bills that may be related, putting yields on some securities out of line with broader curve moves, but no indication of any general contagion beyond the general impact of recent crypto-asset ructions on global risk markets.
Barclays Plc strategist Joseph Abate reckons redemptions in Tether, for example, are only likely to cause notable strains in traditional money markets if they climb beyond half of the stablecoin’s total holdings.
One reason for that is that Treasury bills are likely to constitute most of the initial liquidation and there is already a supply-demand balance within these markets that means any extra assets should be mopped up relatively easily. It’s only if the redemptions start affecting Tether’s commercial paper holdings and certificates of deposit that they’re likely to really roil things, in his view.
“In a run, Tether might be forced to fire-sell its holdings in order to meet redemptions,” Abate wrote in a note to clients Thursday. “Money market investors are nervous that if Tether is pushed to sell its CP and CD holdings, these normally illiquid markets could lock up, as they did in March 2020.”
Yet while Tether has broken the buck, Abate reckons these kind of concerns about money-market assets “may be somewhat premature.”
“There is plenty of appetite for Tether’s bills should it need to sell them,” Abate wrote in a note to clients Thursday. “Strains in traditional money markets might emerge only if Tether’s redemptions exceed 50%, and these might be limited to the small market for lower-tier CP.”
Treasury Secretary Janet Yellen, speaking on Thursday to a committee of lawmakers in the wake of the recent turmoil involving TerraUSD, said that stablecoin risks are not yet big enough to present a “real threat to financial stability, but they’re growing very rapidly and they present the same kind of risks that we have known for centuries in connection with bank runs,”
The price of Tether, the largest of the stablecoins used in cryptocurrency markets to facilitate trading, slipped as low as 94.55 cents from its intended one-to-one peg to the dollar on Thursday before recovering to par, Bloomberg-compiled data show. Officials said in a statement they had honored more than $300 million redemptions and processing more than $2 billion “without issue.”