The Blackrock USD Institutional Digital Liquidity Fund (BUIDL), Franklin Templeton’s OnChain US Government Money Market Fund (FOBXX), and Ondo Finance’s USDY token are bracing for a key event that could affect their growth.
These assets have seen elevated growth in the past few months. BUIDL has accumulated over $519 million in assets, while FOBXX has over $402 million. Ondo Finance’s has over $342 million.
The tokens have done well this year because they are widely seen as better alternatives to popular stablecoins like Tether and USD Coin. Unlike USDT, these assets have a 1:1 peg and provide a yield to their holders. USDY yields 5.35%, while FOBXX yields about 5.26%.
These assets generate their yields by investing in liquid government bonds. In the past few years, these yields have been relatively high because of elevated interest rates. The Fed pushed these rates to 5.5% to battle elevated inflation.
The Federal Reserve is expected to start cutting interest rates in the next meeting in September. Some analysts expect the Fed to cut even before the official meeting day on September 18.
The Fed could decide to slash rates by either 0.25% or 0.50% depending on the next inflation and August’s non-farm payroll (NFP) data. If these numbers come out weaker than expected, they will confirm the case of a 50 basis point cut.
These expectations explain why US Treasury yields are retreating. On Tuesday, the 10-year yield fell to 3.8%, while the 2-year fell to 3.9%. Therefore, these yields mean that investors will have little incentive to hold the three assets.
Altogether, investors have allocated over $6.1 trillion in money market funds. These funds will likely flow to other assets like stocks and even cryptocurrencies when rates fall. This is one reason these assets will likely do well when the Fed cuts rates.
Still, BUIDL, FOBXX, and USDY will likely be more attractive than Tether and USDC because the Fed is not expected to move rates back to zero. Instead, the Fed rates could bottom at 2%, meaning these assets will be better for holders.
