UBS previously anticipated that the rapid expansion phase of short-term US Treasuries' share of tradable debt had concluded. However, the GENIUS Act might trigger renewed growth. This legislation mandates stablecoin issuers to maintain 100% reserve backing with high-quality, liquid assets. Approved reserves include US cash, short-term US Treasuries, deposits at insured depository institutions, and short-term Treasury repurchase agreements.
The Bank for International Settlements (BIS) estimates that stablecoins have already purchased about $40 billion in US short-term Treasuries, comparable to the largest US government money market fund and exceeding holdings by many countries. Despite the debt ceiling resolution and government money market fund expansion, the short-term Treasury market remains capable of absorbing more.
If the GENIUS Act spurs additional demand for short-term Treasuries, the US Treasury could slightly delay increasing the issuance of interest-bearing Treasuries and have more leeway to repurchase less liquid old bonds. UBS expects the Treasury to maintain a stable ratio between short-term and interest-bearing Treasuries.
The growth of stablecoins hinges on how much demand is genuinely new. Since 2019, US government money market funds have doubled to $7 trillion, while stablecoins' market cap is around $240 billion. US Treasury Secretary Besent considers $2 trillion a reasonable stablecoin market size, with potential for growth.
Stablecoins' expansion will depend on international usage, and the legislation aims to enhance the global use of the dollar through stablecoins.
