Analysis on whether the sharp drop in U.S. debt will lead to a thunderstorm for USDC/USDT?
Original author: CapitalismLab
Will the plunge in U.S. debt cause USDC/USDT to explode? Due to the recent spread of pessimism in the market and the drop in U.S. bond prices caused by the Fed’s interest rate hike, many friends have already started asking this question. It just so happens that I have some experience in bonds, so I just wrote this Thread to clarify this matter:
The problem stems from the fact that some people suspect that after the price of U.S. bonds falls, the book value of the U.S. bonds in Circle’s hands will naturally decline, which may make it impossible to pay in full. It sounds like the same thing. Considering that everyone is not so familiar with the price and interest of bonds, I will give you an example to supplement the basic knowledge of bonds.
For example, suppose you buy a 10-year U.S. bond with a face value of $100 in 2020 and pay an annual interest rate of 1%, but due to interest rate hikes, the market is only willing to buy 8 at a 4% interest rate in 22 years ( 10-2 ) 1-year U.S. bonds, but the U.S. Treasury Department will not take the initiative to pay more interest on ordinary bonds that have been issued, so you can only achieve this goal by reducing the price of your bonds and expanding the price difference 100* 1.01 ^ 8 =x* 1.04 ^ 8 , x= $79, plummeting 21%!
"For ease of understanding, the above calculations are actually simplified." The person who buys this bond at $79 now can get the principal of $100 plus the interest of $1 per year after 8 years, and the combined interest rate is 4%. "Once again, the calculation is simplified." Fundamentals of decline.
Does it sound scary? But don't panic, let's reduce the hypothetical remaining time to 1 month and see what happens 100* 1.01^(1/12)=x* 1.04^(1/12)x=$99.8, only down 0.2% ! In addition, remember that the face value of the principal can be returned when the bond matures, so as long as the bond period purchased is short enough, the risk is very low.
Let's take a look at Circle's latest report. The reserves are almost all U.S. debt and cash. U.S. debt shows an average weighted maturity of 27.8 days, plus Circle itself has a certain amount of capital, and the current size of USDC is relatively large compared to the overall size of U.S. debt. It is relatively small, and I believe that even in the face of 100% short-term redemption, it is still bearable. (Note that the above assumptions are true based on the audit report)
In comparison, USDT reserves are more complicated, but U.S. debt is still the mainstay, the average maturity time is less than 45 days, and the ability to deal with risks is relatively strong.
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