Circle Drops Long-Term US T-Bills

Investors are shunning their T-bills, citing concerns over the potential default of the US government, which the Treasury Department has warned could come as soon as June 1.

the United States Capitol on fire, art generated by Midjourney

Stablecoin issuer Circle rebalanced the mix of reserves backing its USD Coin to get rid of Treasuries that mature beyond early June, CEO Jeremy Allaire told Politico.

Circle, the issuer of USDC stablecoin, seeks to avoid a potential default of the U.S. government amid rising concerns that debt ceiling talks in Congress will end with no deal. The Treasury Department has warned that the unprecedented default — also known as the “X-date” — could come as soon as June 1, unless a bipartisan agreement on raising the $31 trillion borrowing limit is reached.

“We don’t want to carry exposure through a potential breach of the ability of the U.S. government to pay its debts,” Circle CEO Jeremy Allaire said in an interview.

Dune dashboard of stablecoin market
Circle's USDC is the second-largest stablecoin, after Tether's USDT, with about $31 billion worth in circulation, according to Dune dashboards.

According to BlackRock, which is managing Circle’s $27.3 billion reserve fund, the stablecoin issuer currently holds no U.S. government Treasuries that mature past May 31.

Short-term US Treasuries, also known as Treasury bills or T-bills, are debt securities issued by the US Treasury Department with maturities ranging from a few days to 52 weeks, with the most common being 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks.

Since the default of the US government is simply unthinkable, Treasuries are considered nearly risk-free, although they also have relatively low returns. They are widely used by investors as a short-term cash management tool or as a safe-haven asset during times of market volatility or economic uncertainty.

However, as Democrats and Republicans in Congress are locked in a stalemate over the cuts in federal spending and the amount by which the U.S. debt ceiling should be raised, anxious investors are shunning T-bills with maturity dates around the X-date. According to the White House, yields on short-duration Treasuries around the expected default have surged by nearly 1 percentage point, or roughly 20 percent, increasing the cost of borrowing for the U.S. government and thus the cost to taxpayers.

The major source of disagreement between the two parties lies in the scope of budget cuts. While House Democrats are advocating for a “clean” bill that does nothing except raise the debt ceiling, Republicans insist on an agreement to pay debts resulting from spending and budget cuts.

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Former U.S. President Donald Trump recently endorsed Republicans to let the nation default on its debt if Democrats don’t agree to cuts, saying that the US has been “spending money like drunken sailors.”

Speaking to reporters ahead of the May 11 G-7 meeting in Niigata, Japan, Treasury Secretary Janet Yellen commented on the ex-president’s suggestion, saying that it’s “unthinkable” for the US to default on its debt.

“The notion of defaulting on our debt is something that would so badly undermine the U.S. and global economy that I think it should be regarded by everyone as unthinkable,” said Janet Yellen, quoted by CNBC.

“There is no good alternative that will save us from catastrophe. I don’t want to get into ranking which bad alternative is better than others, but the only reasonable thing is to raise the debt ceiling and to avoid the dreadful consequences that will come,” she told reporters, adding that the US Congress has raised or suspended the debt limit almost 80 times since 1960 and can do it once again.

In modern history, the US has never reached the point of default when it was unable to pay its debt obligations, although it was pretty close to it on several occasions.