Tokenized Rate Cuts
As the list of candidates for the next Chair expanded to 11 candidates, Trump signaled the list had already narrowed to 3 to 4, and the next Chair will be announced ‘soon,’ In Trump’s guidance, which means typically in one to three weeks, which puts the announcement right before the Sep FOMC.
The probability of a cut in September rose above 100%, which technically opens the door to pricing the chances for a 50bps cut. The CME FedWatch tool has that probability at 2.1 percent.
“The conditional probability,” which is the Bayesian formula of the chance of an event occurring given that another event already happened, has the chances of a 50 bps cut between September and December at 53 percent (Figure 1).
In Bessent’s view, had the BLS data been available in a higher quality format, rates could have been cut several times, which implies to Bessent that current rates are 100 to 175bps too restrictive.
By removing this policy restriction, the stock and the bond market are treating these probabilities as “good news” cuts. They are also seen as non-inflationary rate cuts, as indicated by the yield curve steepening, which occurs when short-term rates are pushed down by rate cut probabilities while inflation expectations fall.
While Bessent effectively massaged expectations, other essential comments highlighted the Treasury’s “plan” to shift the Treasury curve down by targeting intermediate issuance, which is now being explored through tokenization and blockchain issuance.
Figure 1: Conditional probability of 50bps and chances of 25 in September (%)
Source: CME
Tokenization of Treasuries is already happening in experimental form. The first on-chain financing transaction using tokenized U.S. Treasuries as collateral and USDC as the cash leg was executed over Tradeweb. OpenEden has launched TBILL, the first tokenized money market managed by BNY Mellon, bridging DTCC and blockchain settlement.
As of August, over $6.7 billion in tokenized Treasuries are outstanding across platforms like BlackRock’s BUIDL, Franklin Templeton’s BENJI, and Circle’s USYC. The next step in the process is taken by the Canton Network, which settled a Treasury repo trade on the blockchain entirely with both legs, cash, and digital, exchanged without intermediaries (Figure 2).
The 24/7 nature of this transaction suggests that if repos are regularly traded and settled over blockchain, Treasury issuance and secondary market trading will follow, as the TBAC presented on in 2024, spearheaded by initiatives like BitBonds (Treasuries backed by Bitcoin), and stablecoin integration, utilizing stablecoins for primary issuance and coupon payments.
Chainlink, a decentralized oracle network that enables secure data transfer between blockchains and off-chain systems, will play a critical, likely monopoly role. This is essential for bringing Treasury prices, yields, and settlement instructions onto blockchain platforms, as JP Morgan has utilized Kinexys' private network and Ondo’s public blockchain.
Thus, rate cuts could become a 24-hour/7-day-a-week phenomenon, as the plumbing of Treasuries (funding, repo) allows for futures and cash Treasuries to expand trading into the weekend, eventually, but in my view, sooner than envisioned. In addition, the Treasury could start ‘shotgun’ issuance, i.e., issue new Treasuries at any moment of the day, when new issues are settled over blockchain in seconds.
Bessent didn’t dive that deep in his interview, but he (firmly) suggested more flexibility on rates through different BLS data management, faster adjusting issuance based on demand, and incoming tariff revenues. Irrespective of the prospect of a 24/7 Treasury market, yields are likely lower tactically as the door is open to pricing in, likely entirely, the chance of a 50 bps cut.
Figure 2: Tokenization of Treasuries ($, bn)
Source: news.bitcoin.com