Securitize Capital Market Commentary — May 24th, 2022
Macro
Personal Consumption Expenditures for March show a 5.2% increase versus 3.45% this time last year. Inflation continues to dominate the macro news cycle and we can expect the FOMC to front-load rate hikes with three 50-bps increases beginning this month and 25-bps rate hikes thereafter to combat inflation and to stage a “soft landing.” At the onset of the Pandemic, the Fed’s efforts to stimulate the economy led to a parallel shift of term structure leading the yield curve into negative real rates. We expect the 10Y/3M spread to continue to steepen as the Fed recalibrates (Exhibit 1). Equity prices and bond yields fell as the markets moved from inflation to recession. If not managed well, inflation and unemployment risk could be a catalyst for a full-blown recession, further compounded by China lockdowns and the prolonged Russia-Ukraine conflict. An intense correction across lower-quality and longer-duration assets will likely persist, and as the debate between “hard” and “soft” landing continues, we caution against less liquid markets, which may lose sponsorship as the liquidity backdrop tightens and favors liquid short duration assets.
Exhibit 1: Gold 3-month Gold 25-delta Risk Reversal
Source: Bloomberg as of May 24, 2022.
Cryptoland
Spot
Overall, the market has been in a congestion phase after the May 12th selloff, at approximately $1.2 trillion market cap, a 35% decrease since last November. Color from various OTC trading venues indicate orderly liquidation and institutional bids during recent sessions. Tether, a stablecoin fully backed by reserve assets, saw a $9 billion redemption after the de-pegging of TerraUSD on May 9th. According to Tether’s consolidated reserves report, as of March 31st, the reserve holds commercial paper ($20 billion) and T-bills ($39 billion). Their recent redemption does not seem to result in either contagion in the CP or T-bill markets. In addition, $5 billion shifted into USDC and BUSD, both of which invest in T-bills, offsetting potential T-bill liquidation out of Tether reserve. Net outflow was $4 billion and spillover has been contained.
Surprisingly, BTC had been trading in a narrow range of $29,000 to $30,000 last week, completing a dominant Wave 5 (Exhibit 2). A negative incoming economic release, compounded by illiquidity in the market, is expected to push BTC price action outside of channel gapping down to $20,000.
Exhibit 2: Bitcoin Price Actions
Source: Bloomberg as of May 24, 2022
Options
Implied vols retraced back to “normal” levels of 70%-80% p.a. for both BTC and ETH, down from 200% at the height of selloff two weeks ago. However, fear did not go away; risk reversals remained skewed toward puts.
Spotlight: USD Tether (USDT)
Stablecoins are classified into two categories: algorithmic and reserve-backed. Algorithmic stablecoins use code and various types of mint-and-burn mechanisms to maintain a $1 peg. However, reserve-backed stablecoins keep reserves of assets to match their current market capitalization so that liquidity can always be guaranteed. Tether (USDT; $74 billion market cap), one of the largest stablecoins, is reserve-backed, unlike TerraUSD (UST), which was algorithmic. USDT does not have its own blockchain, but instead operates on the blockchains of Bitcoin, Ethereum, Tron, EOS, Bitcoin Cash, Tron, Algorand, and OMG, and is secured by their respective hashing algorithms. Its use cases include cheap and fast international payments, DeFi collateral, crypto-native “safe-haven” assets, and crypto-crypto spot and derivatives trading.
Historically, USDT had not been a zero-volatility asset with an unstable peg, albeit with small deviations (Exhibit 3). Arbitrageurs on the network can buy USDT in a secondary market and redeem for $1 to maintain the peg, and it often exhibits “safety and latency” premiums. Crypto exchanges have long processing lags for dollar withdrawals due to compliance and legacy system issues and they impose fees when dollar withdrawals are frequent or large. In periods of risk, investors demand USDT to liquidate risky crypto assets into a store of value with minimal transaction costs. When investors perceived risk of the Tether Treasury not being fully backed, USDT traded at a discount to $1. For instance, shortly after UST lost its $1 peg, stablecoin headline risk pushed USDT to 95 cents before recovering to 99 cents the following day.
Exhibit 3: USD Tether Historical Price
Source: Bloomberg as of May 24, 2022.
USDT was able to fulfill recent $9 billion redemption requests out of its liquid reserve balance sheet, while remaining close to its $1 peg and the Tether Treasury has consistently been growing to keep up with the market cap of the currency. The amount of commercial paper, short-term loans to companies Tether owns fell 17% to $20.1 billion during the period, and declined a further 20% since Apr 1. Tether’s most recent disclosure showed that the treasury holds foreign government debt (1%) in addition to treasury bills (Exhibit 4).
Exhibit 4: USD Tether Consolidated Reserves Report
Source: MHA Cayman May 18, 2022.
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