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Friday, December 22, 2023

Closer Look at Onchain T-Bills Strategies


Tokenized T-Bills have experienced a 700% growth in 2023. Onchain T-Bills leverage global liquidity, DeFi composability and transparency. Different market participants can all benefit from tokenized T-bills in different ways.

Investors' strategies include interest rate hedging, creating T-Bill ladders, and diversifying portfolios.

Treasurers can deploy idle stablecoins for additional returns, similar to MakerDAO's strategy.

Traders benefit from short-term yield spreads and use T-Bills as collateral in DeFi.

Asset managers use T-Bills as a risk-off tool and portfolio stabilizer during market volatility.

Treasury bills (T-Bills) are widely recognized as one of the safest investment options available, but like any financial instrument, they come with their own risk/return profile. In this article, we will delve deep into the world of T-Bills, examining what makes them an attractive choice for investors and the potential downsides that must be considered.

Tokenized T-Bills boom of 2023

U.S. T-Bills are short-term U.S. government debt obligations backed by the Treasury Department with a maturity of one year or less. Treasury bills are assigned a face value, which is what the bill is worth if held to maturity. You purchase bills at a discount — a price below the face value — and profit from the difference at the end of the term.

Beginning of 2023. We observe an increased demand for tokenized RWAs with the U.S. T-Bills at its forefront. One of the most important factors that influenced a staggering 700% growth of onchain T-Bills, is the economic environment with a risk-free rate of around 5%. Such a low-risk asset opens the door for multiple opportunities, which we will analyze in this article.

T-Bill strategies

Treasury bills are undoubtedly a very attractive investment vehicle for both institutional and retail investors. These T-Bill strategies showcase the flexibility of Treasury Bills in serving a wide range of financial goals, from risk management to capital preservation and income generation. Choosing the right strategy depends on individual or institutional objectives, risk tolerance, and market conditions.

For Investors

T-Bills offer a safe, income-generating, and interest rate-hedging investment option.

Investors can use T-Bills for interest rate hedging. If they are concerned about rising interest rates, they can invest in shorter-term T-Bills. Shorter-term T-Bills are less sensitive to interest rate fluctuations, helping investors protect their portfolios from potential losses.

Investors seeking a steady income stream can create a T-Bill ladder, consisting of T-Bills with staggered maturities. As T-Bills mature, they can be reinvested in longer-term T-Bills to maintain income continuity while taking advantage of potentially higher yields. For diversification purposes, investors and asset managers can include T-Bills alongside other asset classes. T-Bills provide stability and can act as a counterbalance to riskier assets in a portfolio.

Investors with known future financial obligations (say tuition fees or tax payments), can invest in T-Bills that mature just before these expenses are due. This approach ensures that the necessary funds are available at the right time, without exposing the investor to market volatility.

For Treasurers

T-Bills provide liquidity management with safe and income-earning potential for idle funds.

Treasurers often use T-Bills as part of their liquidity management strategy. They can invest excess cash in T-Bills, which are highly liquid and can be easily converted to cash when needed. Onchain treasuries often hold idle stablecoins that can be invested, generating additional returns for the protocol. The T-Bill strategy ensures that an organization's funds remain safe while generating some return, rather than sitting idle in non-interest-bearing accounts (here, wallet addresses).

One of the most prominent examples of a protocol deploying their treasury to traditional financial assets is MakerDAO. While they do not use tokenized assets and instead have their own off-chain processes, the revenue generated from this strategy hit an impressive amount, accounting for 80% of all of their revenue.

For Traders

Traders gain from T-Bills through short-term yield spreads and capital gains opportunities.

Traders can take advantage of short-term trading opportunities in the T-Bill market to capture yield spreads between T-Bills with different maturities. They can buy T-Bills with shorter maturities and sell them when they anticipate interest rates will fall or demand will increase, leading to capital gains. Thanks to the innovative approach of Web3 players, we are already presented with onchain alternatives.

For Asset Managers

T-Bills serve as a risk-off tool and portfolio stabilizer during market volatility.

Asset managers may use T-Bills as a risk-off investment during uncertain market conditions or as a temporary safe haven. When markets are volatile or showing signs of a downturn, asset managers can allocate a portion of their portfolios to T-Bills to reduce overall risk exposure.

Asset managers can use T-Bills to match the duration of their bond portfolios. By purchasing T-Bills with maturities that align with the expected cash outflows from bonds, they can effectively manage interest rate risk. This strategy helps maintain portfolio stability and ensures that funds will be available when needed to meet bond obligations.

Onchain T-Bills - what’s the big deal?

T-Bills provide a range of possibilities in its traditional form. Then, what do tokenized T-Bills bring to the table?

  • Global access. Unlocking a new era in financial efficiency, tokenized T-Bills offer a myriad of advantages that redefine the landscape of traditional investments. One key advantage lies in the realm of global accessibility, providing investors with an unprecedented level of reach and inclusivity. For investors abroad, this equals to a more streamlined investment process, without additional banking hussle. This global accessibility not only fosters a more diverse investor base but also enhances liquidity in the market.

  • Composability. The key advantage of tokenizing traditional financial assets is the ability to seamlessly integrate them with various protocols. A prime example is leveraging these RWAs as collateral for lending, margin trading, or in the development of asset-backed stablecoins. Maturity of the traditional market provides exposure to less risky yields that complement a dynamic DeFi landscape.

  • Transparency. The concept of an onchain treasury powered by tokenized T-Bills brings an emphasis to transparency. By putting idle stablecoins to work on the blockchain, investors gain visibility into the allocation and utilization of funds, fostering trust and confidence in the financial system.

  • Transferability. By digitizing and tokenizing T-Bills on the blockchain, the process of transferring ownership becomes seamless, efficient, and transparent. This not only reduces administrative burdens but also enhances liquidity in the market, allowing investors to buy and sell T-Bill tokens with greater ease.

  • Instant settlements. With traditional settlement systems often plagued by delays and intermediaries, the adoption of smart contracts enables near-instantaneous clearing and settlement of transactions (provided the liquidity is available at a given time). Tokenized T-Bills, benefiting from this innovation, allow investors to enjoy immediate access to their funds post-transaction. This not only enhances liquidity but also reduces counterparty risks and operational inefficiencies associated with prolonged settlement periods. The speed and efficiency of instant settlements contribute to a more agile and responsive financial onchain ecosystem.

Treasury Bills in the traditional sense are just an investment instrument. By leveraging blockchain technology and onchain composability, tokenized T-Bills contribute to the transparency and efficiency of the onchain financial landscape.

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