Bessent is changing its strategy for issuing Treasury securities, focusing more on short-term bills. They expect stablecoins to become significant buyers of U.S. government debt. This shift stems from the belief that stablecoins will boost demand for U.S. Treasuries, especially short-term bills. With the new July ‘Genius Act’, stablecoins must be supported by highly secure, liquid assets like Treasury bills. This law is likely to promote stablecoin growth and, in turn, increase interest in short-dated Treasuries. However, the total issuance will still consider general market feedback.

Stablecoins’ Role in the Treasury Market

Stablecoins strive to keep a $1 value by investing in high-quality short-term debt. Currently, the stablecoin market is about $250 billion, while the Treasury market is around $29 trillion. Bessent informed Congress that the stablecoin market could grow to about $2 trillion in the next few years. Since January, the Treasury has been more involved in the market, expressing greater concern about the demand for debt. Stablecoins are expected to play a crucial role in meeting this demand, aligning with the Treasury’s overall market strategy. We should expect a drop in front-end yields as Treasury tailors its issuance to attract this new major buyer. This strategy will create a steady, price-insensitive demand for T-bills from the expanding stablecoin market. The primary outcome will be a stabilizing effect on short-term rates, even amid varying market pressures. This anticipated demand is already evident in the numbers. The stablecoin market cap has risen to over $340 billion as of August 15, 2025, marking a nearly 40% increase since the “Genius Act” was enacted last year. This growth is reflected in auction outcomes, with the bid-to-cover ratio for the 3-month bill on August 18, 2025, reaching 3.4, significantly above the 2.9 average from the first half of the year.

Impact on Yield Curve and Strategies

The clearest strategy here is to create a yield curve flattener, likely by going long on 2-year Treasury note futures (ZT) while shorting 10-year note futures (ZN). This approach will benefit as the strong demand for bills keeps short-term yields low compared to long-term ones. We predict the 2s/10s spread, currently at 45 basis points, will narrow sharply soon. Additionally, we can position ourselves for lower-than-expected policy rates using Secured Overnight Financing Rate (SOFR) futures. Market expectations currently show a 65% chance of another Fed rate hike by November 2025, aimed at addressing ongoing wage inflation. However, the significant new demand for bills could do some of the Fed’s work for them, which may lead the central bank to pause. This situation resembles a targeted, private-sector version of the quantitative easing programs from the 2010s. Back then, consistent central bank purchases reduced bond market volatility. We might see a similar trend now, which could make selling volatility on short-term rate options appealing, though it carries risks. The main risk here is if stablecoin growth falls short of the Treasury’s ambitious $2 trillion target or if inflation rises unexpectedly. A sharp increase in core CPI would force the Fed to raise rates aggressively, potentially outpacing stablecoin demand. Therefore, we must closely monitor upcoming inflation reports for any signs of a rebound. Create your live VT Markets account and start trading now.

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