In the face of looming default rumors as we approach the “X-Date,” USDC stablecoin issuer Circle has rebalanced its reserve holdings to shift away from U.S. Treasury security T-bills with a maturation date after May 31, 2023. T-bills are short-term debt securities issued by the U.S. government that have a 4-week to 1-year maturity period before they can be redeemed for their total value.
What is a Treasury Bill (T-bill)?
When an investor purchases a T-bill, they pay a price less than the face value of the bill. This price is determined through a competitive bidding process where investors submit bids for T-bills at different discount rates. The discount rate is the annualized percentage rate that investors will earn on their investment based on the difference between the purchase price and the face value of the bill. At maturity, the investor receives the total face value of the T-bill from the U.S. government.
T-bill Discount and Interest Rates Explained
The discount rate investors bid is critical in determining T-bill interest rates. Typically, the lower the discount rate, the higher the interest rate. The interest rate on a T-bill is an investor’s return on their investment. The U.S. government decides on a minimum discount rate for T-bills, and If many people want to buy T-bills, the discount rate may be lower, and investors earn a higher interest rate. Conversely, if there are few buyers, the discount rate may be higher, and investors would make a lower interest rate.
T-bill Maturity Explained
The maturity of a T-bill is an essential consideration for investors because it affects the period their money will be tied up in the investment. Shorter-term, T-bills have lower yields but are less risky, while longer-term T-bills have higher yields but are riskier. The maturity of a T-bill is typically four weeks (28 days), 13 weeks (91 days), 26 weeks (182 days), or 52 weeks (364 days).
The Risk of Investing in T-bills
T-bills become risky if the U.S. government defaults on its debt obligations, which can occur if the debt ceiling is not raised. In the event of a default, the U.S. government may be unable to pay the total face value of the T-bills, leaving investors with losses. As a result, T-bills may not be a safe investment option during political or economic uncertainty, mainly if there are concerns about the government’s ability to meet its financial obligations.
If Circle continues to hold T-bills scheduled to reach maturity after June 1 and the debt ceiling has yet to be raised by that date, Circle will never see returns from those investments.
