Research firm Kaico believes tokenized government bonds will continue to attract investors despite expected interest rate cuts by the U.S. Federal Reserve (Fed), which could make fixed-income assets less attractive.
According to the firm's second-quarter market report, interest in these tokenized funds continues to grow as they are attractive to investors seeking liquidity and safety.
Kaiko explained that even if interest rates were to be cut, the inflation-adjusted real federal funds rate could remain stable or even rise. Treasuries could remain attractive relative to riskier assets in this scenario as investors prioritize liquidity and safety.
Expanding activities
According to Kaiko's research, BlackRock's on-chain tokenized fund BUIDL has become the largest on-chain fund by assets under management (AUM) since its launch in March, bringing in net inflows of $520 million as of the end of June.
The fund is part of a growing trend of tokenized funds offering exposure to traditional debt securities such as U.S. Treasuries. Other notable funds include Franklin Templeton's FOBXX, Ondo Finance's OUSG and USDY, and HashNote's USYC, all of which offer yields tied to the federal funds rate.
The report also details the growing activity in the on-chain market for these tokenized assets: OndoFinance’s governance tokens, Ondo, After announcing its partnership with BUIDL, trading increased significantly, hitting an all-time high. In June it was $1.56.
assignment
But the report noted that these funds may face challenges inflowing capital as the U.S. interest rate environment shifts since the market frenzy subsided.
The appeal of tokenized Treasury funds may continue despite the expectation of a possible Fed rate cut, as markets are pricing in a 100bps rate cut this year. Recent US inflation data has come in below expectations, raising hopes of a rate cut in September.
But a rate cut does not necessarily translate into an easing of monetary policy. If inflation falls at the same rate or faster than the nominal rate cut, real interest rates may remain stable or even rise. The real federal funds rate, adjusted for the producer price index, has shown a modest increase this year even as nominal interest rates have remained stable.
A $2 billion market
The tokenized U.S. Treasury market hit an all-time high of $1.93 billion on August 14, according to rwa.xyz. dataThe market has grown 150% so far this year.
Following the launch of BlackRock’s BUIDL, Ethereum (ETH) has become the preferred infrastructure for deploying tokenized funds, with $1.4 billion worth of digital assets having been created on the network as of press time.
Stellar comes in second with $430 million deployed, backed by Franklin Templeton’s FOBXX, while Solana and Mantle are also among the most active networks, with $48 million and $30 million in tokenized U.S. Treasury notes deployed, respectively.
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